Consider a simple firm that has the following market-value balance sheet: Assets Liabilities end equity $1 010 Debt $4
Posted: Sat Nov 27, 2021 5:16 pm
Consider a simple firm that has the following market-value
balance sheet:
Assets
Liabilities end equity
$1 010
Debt
$450
Equity
560
Next year, there are two possible values for
its assets, each equally likely:
$1 200
and
$970.
Its debt will be due with
5.1%
interest. Because all of the cash flows from the assets must go
to either 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
45%
in the firm's debt and
55%
in its equity will have the same expected return as the assets
of the firm. That is, show that the firm's pre-tax WACC
is the same as the expected return on its assets.
If the assets will be worth
$1 200
in one year, the expected return on assets will be
18.818.8%.
(Round to one decimal place.)If the assets will be
worth
$970
in one year, the expected return on assets will be
negative 4.0−4.0%.
(Round to one decimal place.)The expected return on
assets will be
For a portfolio of 45% debt and 55% equity,
the expected return on the debt will be______%. (Round to
one decimal place.)
Consider a simple firm that has the following market value balance sheet: Assets $1 010 Liabilities end equity Debt Equity $450 560 Next year, there are two possible values for its assets, each equally likely: $1 200 and $970. Its debt will be due with 5.1% interest. Because all of the cash flows from the assets must go to either 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 45% in the firm's debt and 55% in its equity will have the same expected return as the assets of the firm. That is, show that the firm's pre-tax WACC is the same as the expected return on its assets. If the assets will be worth $1 200 in one year, the expected return on assets will be 18.8 %. (Round to one decimal place.) If the assets will be worth $970 in one year, the expected return on assets will be - 4.0 %. (Round to one decimal place.) The expected return on assets will be 7. %. (Round to one decimal place.) For a portfolio of 45% debt and 55% equity, the expected return on the debt will be %. (Round to one decimal place.)
balance sheet:
Assets
Liabilities end equity
$1 010
Debt
$450
Equity
560
Next year, there are two possible values for
its assets, each equally likely:
$1 200
and
$970.
Its debt will be due with
5.1%
interest. Because all of the cash flows from the assets must go
to either 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
45%
in the firm's debt and
55%
in its equity will have the same expected return as the assets
of the firm. That is, show that the firm's pre-tax WACC
is the same as the expected return on its assets.
If the assets will be worth
$1 200
in one year, the expected return on assets will be
18.818.8%.
(Round to one decimal place.)If the assets will be
worth
$970
in one year, the expected return on assets will be
negative 4.0−4.0%.
(Round to one decimal place.)The expected return on
assets will be
- Consider A Simple Firm That Has The Following Market Value Balance Sheet Assets Liabilities End Equity 1 010 Debt 4 1 (143.16 KiB) Viewed 205 times
the expected return on the debt will be______%. (Round to
one decimal place.)
Consider a simple firm that has the following market value balance sheet: Assets $1 010 Liabilities end equity Debt Equity $450 560 Next year, there are two possible values for its assets, each equally likely: $1 200 and $970. Its debt will be due with 5.1% interest. Because all of the cash flows from the assets must go to either 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 45% in the firm's debt and 55% in its equity will have the same expected return as the assets of the firm. That is, show that the firm's pre-tax WACC is the same as the expected return on its assets. If the assets will be worth $1 200 in one year, the expected return on assets will be 18.8 %. (Round to one decimal place.) If the assets will be worth $970 in one year, the expected return on assets will be - 4.0 %. (Round to one decimal place.) The expected return on assets will be 7. %. (Round to one decimal place.) For a portfolio of 45% debt and 55% equity, the expected return on the debt will be %. (Round to one decimal place.)