A firm is financed entirely with equity and has a beta of 0.90. The risk free rate is 4% and expected return on the market is 10%. The firms capital structure manager, Frank, would like to raise debt so that the debt ratio will be 60%.

a) After achieving Franks target debt ratio, what would be the firms cost of equity?

b) Tammy, the capital budgeting manager is not happy with Franks decision and the new cost of equity. She suggests that the cost of equity capital should not exceed 16%. What should be the debt ratio to achieve 16% cost of equity?