6 Problem 16-14 Leverage and the Cost of Capital (LO1) 10 points Skipped A firm currently has a debt-equity ratio of 1/4 . The debt, which is virtually riskless, pays an interest rate of 6.3%. The expected rate of return on the equity is 13%. What would be the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/5 ? Assume the firm pays no taxes. Hint: First find the Return on Assets (WACC assuming no debt) which is expected to stay constant when the debt is risk-free (not realistic) and when there is no tax benefit of interest expense. Once you solve for the ROA, then find the new ROE. If debt is added, the ROE should increase (or decrease if debt is reduced). eBook Hint Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Expected rate of return on equity Ask Print %