A firm has a debt/equity ratio of 1/2. The debt pays a 5% rate of interest. The expected rate of return on equity is 10%. What would happen to the expected rate of return on equity if the firm reduced its debt/equity ratio to 1/3 (return on assets remaining the same)?

a) rate of return on equity would increase to 11.33%

b)rate of return on equity would decrease to 10.60%

c)rate of return on equity would increase to 12.50%

d)rate of return on equity would decrease to 9.44%

Answer rating: 100% (QA)

Solution Givenexistingd debt to equity 12 existing earnings for debt 5 existi... View the full answer