Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Consider a simple firm that has the following market-value balance sheet: Next year, there are two possible values for its assets, each equally likely: SI,200
Consider a simple firm that has the following market-value balance sheet: Next year, there are two possible values for its assets, each equally likely: SI,200 and $960. Its debt will be due with 4. 9% interest. Because all of the cash flows from the assets must go either to the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested 44% in the firm's debt and 56% in its 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 year, the expected return on assets will be %. (Round to one decimal place.) If the assets will be worth $960 in one year, the expected return on assets will be %. (Round to one decimal place.)The expected return on assets will be %. (Round to one decimal place.) For a portfolio of 44% debt and 56% equity, the expected return on the debt will be %. (Round to one decimal place.)If the equity will be worth $727. 95 in one year, the expected return on equity will be (Round to one decimal place.)If the equity will be worth $487. 95 in one year, the expected return on equity will be . (Round to one decimal place.)The expected return on equity will be %. (Round to one decimal place.)The expected pre-tax return on a portfolio of 44% debt and 56% equity will be %. (Round to one decimal place. There may be a slight difference due to rounding.) Consider a simple firm that has the following market-value balance sheet: Next year, there are two possible values for its assets, each equally likely: SI,200 and $960. Its debt will be due with 4. 9% interest. Because all of the cash flows from the assets must go either to the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested 44% in the firm's debt and 56% in its 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 year, the expected return on assets will be %. (Round to one decimal place.) If the assets will be worth $960 in one year, the expected return on assets will be %. (Round to one decimal place.)The expected return on assets will be %. (Round to one decimal place.) For a portfolio of 44% debt and 56% equity, the expected return on the debt will be %. (Round to one decimal place.)If the equity will be worth $727. 95 in one year, the expected return on equity will be (Round to one decimal place.)If the equity will be worth $487. 95 in one year, the expected return on equity will be . (Round to one decimal place.)The expected return on equity will be %. (Round to one decimal place.)The expected pre-tax return on a portfolio of 44% debt and 56% equity will be %. (Round to one decimal place. There may be a slight difference due to rounding.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started