Prokter and Gramble (PG) has historically maintained a debt-to-equity ratio (D/E) of approximately 0.4. Its return on equity is 7.5% and it can borrow at 4.3%. PGs tax rate is 40%.

PG believes it can increase debt without any serious risk of distress or other costs. With a higher debt-to-equity ratio of 0.6, it believes its borrowing costs will rise only slightly to 4.6%.

1. Determine PGs current asset return r_A (before increasing its debt-to-equity ratio)
2. Determine PGs cost of capital after PG raises its debt-to-equity ratio to 0.6.