Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's
1 answer:
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Solution :
a). The current market value of the unlevered equity
= $ 40.45 million
b). The market value of the equity one year from now is
= $ 44.5 million - $ 18 million
= $ 26.5 million
c). The expected return on the equity without the leverage = 10%
The expected return on the equity with the leverage =
= 0.93 %
d). The lowest possible value of equity without the leverage = $20 million - $ 18 million
= $ 2 million
The lowest return on the equity without the leverage = 10%
The lowest return on the equity with the leverage = 2 % as the equity is eroded.