ogoluwa

Suppose Re = 16%, Rd = 5%, Tax = 20% Debt to Asset ratio = 50%
WACC = 0.5 x 5(1-20%) + 0.5 x 16
WACC = 0.5 x 4 + 0.5 x 16
WACC = 2+8
WACC = 10%
Using the formula (incorrect)
Re = Ro + (Ro - Rd)(1-t) D/E
Re = 10 + (10 - 5)(1-20%) x 0.5/0.5
Re = 10 + 5(1-20%) x 1
Re = 10 + 4
Re = 14% (Which is wrong)
Using the correct formula as CPK mentioned
Re = Ro + (Ro - Rd(1-t)) x D/E
Re = 10 + (10 - 5(1-20%))x 0.5/0.5
Re = 10 + (10 - 4) x 1
Re = 10 + (6)
Re = 16% (Which is correct)