Prokter and Gramble (PG) has historically maintained a debt-to-equity ratio (D/E) of approximately 0.3. Its return on equity, r_E, is 7% and it can borrow at 4.3%. PGs tax rate is 35%.

PG believes it can increase debt without any serious risk of distress or other costs. With a higher debt-to-equity ratio of 0.5, it believes its borrowing costs will rise only slightly to 4.5%.

1. Determine PGs current asset return r_A (before increasing its debt-to-equity ratio)
2. Determine PGs cost of capital, r_WACC, after PG raises its debt-to-equity ratio to 0.5