Sunday, May 31, 2015
A firm currently has a debt-equity ratio of 1/2
A
firm currently has a debt-equity ratio of 1/2. The debt, which is
virtually riskless, pays an interest rate of 6.9%. The expected rate of
return on the equity is 11%. 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.
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