Homework answers / question archive / Consider a simple firm that has the following? market-value balance? sheet: Assets   Liabilities end equity $1 010   Debt $450     Equity 560 Next? year, there are two possible values for its? assets, each equally? likely: $1 200 and $970

Consider a simple firm that has the following? market-value balance? sheet: Assets   Liabilities end equity $1 010   Debt $450     Equity 560 Next? year, there are two possible values for its? assets, each equally? likely: $1 200 and $970

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Consider a simple firm that has the following? market-value balance? sheet:

Next? year, there are two possible values for its? assets, each equally? likely: $1 200 and $970. Its debt will be due with 5.1% interest. Because all of the cash flows from the assets must go to either the debt or the? equity, if you hold a portfolio of the debt and equity in the same proportions as the? firm's capital? structure, your portfolio should earn exactly the expected return on the? firm's assets. Show that a portfolio invested 45% in the? firm's debt and 55% in its equity will have the same expected return as the assets of the firm. That? is, show that the? firm's pre-tax WACC is the same as the expected return on its assets.

For a portfolio of 45% debt and 55% ?equity, the expected return on the debt will be ____% ??