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Term of Loan Interest Rate 1 year 2% 2 year 4% 5 year 6% 10 year 8% Your firm needs $2,000 to finance its assets.
Term of Loan Interest Rate 1 year 2% 2 year 4% 5 year 6% 10 year 8% Your firm needs $2,000 to finance its assets. Three possible combinations of sources of finance are listed below: (1) (2) Assets $2,000 Liabilities $0 Assets $2,000 Liabilities $760 (a one-year loan) Equity $2,000 Equity $1,240 (3) Assets $2,000 Liabilities $760 (a 10-year loan) Equity $1,240 The firm expects to generate revenues of $2,550 and have operating expenses of $2,080. If the firm's tax rate is 40 percent, what is the return on equity under each choice? Round your answers to two decimal places. Choice 1: % Choice 2: % Choice 3: % During the second year, sales decline to $2,050 while operating expenses decline to $1,840. The structure of
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