Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please shows the formula and ans thanks. Consider a simple firm that has the following market value balance sheet: Assets $1,010 Liabilities & Equity Debt

image text in transcribed

please shows the formula and ans thanks.

Consider a simple firm that has the following market value balance sheet: Assets $1,010 Liabilities & Equity Debt Equity $440 570 Next year, there are two possible values for its assets, each equally likely: $1,180 and $960. Its debt will be due with 5.1% 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 $1,180 in one year, the expected return on assets will be 16.8 %. (Round to one decimal place.) If the assets will be worth $960 in one year, the expected return on assets will be -5.0 %. (Round to one decimal place.) The expected return on assets will be 5.9 %. (Round to one decimal place.) For a portfolio of 44% debt and 56% equity, the expected return on the debt will be 5.1%. (Round to one decimal place.) If the equity will be worth $717.56 in one year, the expected return on equity will be 25.9 %. (Round to one decimal place.) If the equity will be worth $497.56 in one year, the expected return on equity will be 12.7 %. (Round to one decimal place.) The expected return on equity will be 6.6 %. (Round to one decimal place.) The expected pre-tax return on a portfolio of 44% debt and 56% equity will be difference due to rounding.) %. (Round to one decimal place. There may be a slight

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

R In Finance And Economics A Beginners Guide

Authors: Abhay Kumar Singh, David Edmund Allen

1st Edition

9813144467, 978-9813144460

More Books

Students also viewed these Finance questions

Question

What is management growth? What are its factors

Answered: 1 week ago

Question

1. Why do people tell lies on their CVs?

Answered: 1 week ago

Question

2. What is the difference between an embellishment and a lie?

Answered: 1 week ago