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Homework answers / question archive / 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

Finance

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?

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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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