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During the next 5 years, the company expects to finance itself with 20% debt and 80% equity. Afterward, it will switch to the industry average
During the next 5 years, the company expects to finance itself with 20% debt and 80% equity. Afterward, it will switch to the industry average capital structure of 10% debt and 90% equity, and it will maintain this capital structure forever. The industry average equity beta is 1.3, while the yield to maturity on the government bonds is 3.5%, and the market risk premium is 5.5%. What is the companys return on equity in the terminal/steady-state period? a. 13.5% b. 10.65% c. 9.6% d. 5.5% e. 3.5%
Correct answer is A, please show why
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