A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually ri
ID: 2635144 • Letter: A
Question
A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 7.9%. The expected rate of return on the equity is 13%. What would happen to the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/3? Assume the firm pays no taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 7.9%. The expected rate of return on the equity is 13%. What would happen to the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/3? Assume the firm pays no taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected rate of return equity %Explanation / Answer
Return on equity (ROE) = net income / total equity
ROE = (net income / sales) * (sales / assets) * (assets / equity)
Form Du
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