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Consider a simple firm that has the following market value balance sheet Assets Llabilities & Equity $1.040 Debt $420 Equity 620 Next year, there are
Consider a simple firm that has the following market value balance sheet Assets Llabilities & Equity $1.040 Debt $420 Equity 620 Next year, there are two posible values for itsats, cach equally likely S1 200 and 5970. Its debt will be due with 51% Interest Because all of the cash flows from the assets must go ether to the debt or the oqully, if you hold a portfolio of the debt and equity in the same proportions as the film's capital structure your portfolio should eam exactly the expected return on the firm's assets show that a portfolio invested 40 in the firm's debt and 60% equity will have the same expected return as the assets of the firm That is show that the firm's WACC is the same as the expected return on its assets If the assets will be worth $1.200 in one you the expected return on assets will be * Round to one decimal place If the assets will be worth $970 in one year, the expected return on asties will be (Round to one decimal place The expected return on assets will be found to one decimal place For a portfolio of 40% debt and 60% equally the gechid retum on the debt will be 10% (Round to one decimal place) if the equity will be worth $750 58 in one year , the expected return on equity will be 0% (Round to one decimal place) of the equity will be worth $528 68 in one year the expected return on equity will be 0% (Round to one decimal place) The expected return on equity will be Round tone decimal ploon) The expected pro-tax return on portfolio of 40% debt and 60% equity will be (Pound to one decimal place. There may be a slight difference due to rounding
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