Firm A and Firm B have identical cash flows. Firm A has a debt-to-equity ratio equal to 1 and Firm B has a debt-to-equity ratio equal to 2. Using bond and equity data for firm A, we know that the equity beta is 2 and the debt beta is 1. Unfortunately, Firm B's debt is not traded so we only know that the equity beta equals 2.3. The risk-free rate equals 5% and the market premium equals 3%. 

What is the expected return on Firm B's debt?

Answer rating: 100% (QA)

To find the expected return on Firm Bs debt you can use the Capital Asset Pricing Model CAPM by subs... View the full answer