Question

while expected return is 6.5, and assuming that the expected return on Royalty Pharma's debt is 3% per year, calculate the expected return on Royalty Pharma's equity? Recall that Royalty Pharma finances its acquisitions by an approximatley even mixture of debt and equity: $4.2 billion and $4.0 billion, respectively. (Note: Your answer should be a number in percentage form. not entering '%'.

Answer 1

Weighted average cost of capital (WACC) = [(S/S+B)*Rs + (B/S+B)*Rb(1-tc)]
	S = equity, B = debt, Rs = Cost of equity, Rb = cost of debt,
	tc = corporations tax rate
Expected return/WACC	6.50%
Expected return on debt/cost of debt	3%.
S (total equity)	4 billion
B (total debt)	4.2 billion
S/(S+B)	4/(4+4.2)
S/(S+B)	0.4878
B/(S+B)	4.2/(4+4.2)
B/(S+B)	0.5122
.065 = .4878*Rs + .5122*(.03)
.065 = .4878*Rs + .015366
.4878*Rs = .049634
Rs = .049634/.4878
Rs = .101751
Expected return on equity/cost of equity	10.18%
The expected return on Royalty Pharma's equity is 10.18