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Company X is currently all-equity financed, and its shares offer an expected return of 18%. The risk- free interest rate is 10%. Draw a graph
Company X is currently all-equity financed, and its shares offer an expected return of 18%. The risk- free interest rate is 10%. Draw a graph with return on the vertical axis and debt-equity ratio (D/E) on the horizontal axis, and plot for different levels of leverage the expected return on assets (ra), the expected return on equity (re), and the return on debt (rd). For simplicity, no matter how large the leverage, assume that the debt is risk-free. Now draw a similar graph with the debt ratio (D/V) on the horizontal axis. (Ignore tax effects.) a
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