Question

Q1. Firm XYZ is currently financed entirely with equity. The market value of the firm's assets and equity is ?? = ?? = 500, and the expected return on the firm's assets and equity is ?? = ?? = 12.5 percent. Suppose the firm issues debt with a value of ? = 200, and uses the proceeds to retire equity. The market value of the firm remains the same, ?? = ?? + ? = 500. If the expected return on the debt is ?? = 7 percent, what is the expected return on the firm's levered equity?

Answer 1

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