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krek1111 [17]
3 years ago
14

A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 6%. The expecte

d rate of return on the equity is 12%. What would be the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/3? Assume the firm pays no taxes.
Business
1 answer:
Svetradugi [14.3K]3 years ago
4 0

Answer:

Expected return on equity is 11.33%

Explanation:

Using Weighted Average Cost Capital without tax formula, overall rate of return is given by the formula:

WACC=(Ke*E/V)+(Kd*D/V)

Kd is the cost of debt at 6%

Ke is the cost of equity at 12%

D/E=1/2 which means debt is 1 and equity is 2

D/V=debt/debt+equity=1/1+2=1/3

E/V=equity/debt+equity=2/1+2=2/3

WACC=(12%*2/3)+(6%*1/3)

WACC=10%

If the firm reduces debt-equity ratio to 1/3,1 is for debt 3 is for equity

D/V=debt/debt+equity=1/1+3=1/4

E/V=equity/debt+equity=3/1+3=3/4

WACC=10%

10%=(Ke*3/4)+(6%*1/4)

10%=(Ke*3/4)+1.5%

10%-1.5%=Ke*3/4

8.5%=Ke*3/4

8.5%=3Ke/4

8.5%*4=3 Ke

34%=3 Ke

Ke=34%/3

Ke=11.33%

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Remainder part of the question:

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Answer:

Option C There were diminishing returns to capital.

Explanation:

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3 years ago
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Zigmanuir [339]

Answer:

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b. Blacksburg

Explanation:

a. Productivity is measured by how much output is derived per input.

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Annandele = 40,000/250

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= $100

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<em />

b. Multifactor productivity would incorporate the other costs such as labor rate and rent.

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Annandale = 4,0000/ (2,800 + 250 * 10)

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Blacksburg = 12,000 / (1,200 + 60 * 7.25)

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3 years ago
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Answer:

open market operation

Explanation:

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3 years ago
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Answer:

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Slav-nsk [51]

Answer:

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