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ROE = [r + (r i) D/E] (1-t) r = 20% i = 15% t = 40% D/E ROE 0 .12 1 .15 5 .27
ROE = [r + (r i) D/E] (1-t)
r = 20%
i = 15%
t = 40%
D/E | ROE |
0 | .12 |
1 | .15 |
5 | .27 |
10 | .42 |
1) Use the Variance ROE formula (below) to compute the corresponding variance/s.d. for each D/E
Variance (ROE) = Var(r)(1+D/E)2 (1-t)2 <-- the 2s are squared.
2) Using Excel normal distribution function set up tables of probability vs. ROE for each d/e level.
3) Graph the different probability distributions for each d/e level in one chart.
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