Acetate, Inc., has common stock with a market value of $20 million
and debt with a market
value of $10 million. The cost of the debt is 14 percent. The current
Treasury-bill rate is 8
percent, and the expected market premium is 10 percent. The beta on
Acetate?s equity is 0.9.
a. What is Acetate?s debt-equity ratio?
b. What is the firm?s overall required return?

Hi!!

I will start the answer giving some variables names definitions, lets call:

E = equity = Common stock and preferred stock.
D = debt = obligations or liability to pay or render.
rE = cost of equity
rD = cost of debt
rF = risk free rate = Treasury-bill rate
rP = market risk premium 
rW = overall required return


What is the company's debt-equity ratio?

The company's debt-equity ratio Indicates what proportion of equity
and debt that the company is using to finance its assets, then:
 
Acetate's Debt-Equity Ratio = $10 million / $20 million = 0.5

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What is the company's overall required return?

Using the CAPM to find rE we have that:

rE = rF + rP * BETA =
   = 0.08 + 0.10 * 0.9 = 
   = 0.17

The overall required return is the weighted average cost of capital;
in this case no taxes was set, then we have:

rW = rE * E/(E+D) + rD * D/(E+D) =
   = 0.17 * 20/30 + 0.14 * 10/30 =
   = 0.16

The firm's overall required return is 16%.

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I hope that this helps you. Feel free to request for a clarification
if you need it.

Regards.
livioflores-ga