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A firm requires an investment of $20,000 and will return $25,000 after one year
A firm requires an investment of $20,000 and will return $25,000 after one year.
If the firm borrows $10,000 at 7% what is the return on levered equity?
Expert Solution
The return on levered equity is computed as follows:
= [ [ Return after one year - Amount of borrowing x (1 + interest rate) ] / Amount of borrowing ] - 1
= [ [ $ 25,000 - $ 10,000 x 1.07 ] / $ 10,000 ] - 1
= ($ 14,300 / $ 10,000) - 1
= 43%
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