2. Given the following information about a farm business: Rate of return on assets 8% Variance of return on assets 4% Interest rate on debt 6%

Variance of interest on debt 9% Asset to Equity 5:1 Tax rate 10% Marginal rate of consumption 50%

a. Compute the expected growth in equity.

b. What level of risk is associated with the rate of growth found in a. of the growth in equity.

c. What might the manager do to increase the rate of growth?

d. If the farm business changes its asset to equity ratio to 7:1, find the changes in the expected growth and risk.