Question 1: From this example, what can you conclude about the conditions under which an increase in leverage will increase ROE? Explain, referring to your results. (Hint: where do the two curves cross? Why do they cross there?)

Part two: From this example, what can you conclude about the effect of leverage on the riskiness of ROE and the probability of insolvency? Explain, referring to your results.

A Bart abuoun - X Comments Share 59% 51% 42% 34% 26% 17% 9% 4% 1% AutoSave Gon e assignment 1 fin 340 - Last Saved 11/21/2019 1:46 PM File Home Insert Page Layout Formulas Data Review View Help Acrobat Tell me what you want to do C25 - X fx AB 1 Cost of house Borrowing rate Down payment Amt. owed EOY house price Final equity1 ROE1%) Final equity2 ROE2 (%) 300,000 0.04 30,000 280,800 345,000 64,200 114% 95,400 60,000 249,600 340,000 59,200 97% 90,400 335,000 54,200 81% 85,400 150% 330,000 49,200 64% 80,400 325,000 44,200 47% 100% 75,400 320,000 39,200 31% 70,400 50% 315,000 34,200 14% 65,400 312.000 31,200 4% 62,400 0% 310,000 29,200 -3% 60,400 $ 50,000 100,000 150,000 200,000 250,000 394 po 350,000 400,000 305,000 24,200 -19% 55,400 -50% 300,000 19,200 -36% 50,400 100% 295,000 14,200 -53% 45,400 290,000 9,200 -69% 40,400 -150% 285,000 4,200 -86% 35,400 280,800 0 -100% 31,200 -200% 280,000 -800 -103% 30,400 250% 275,000 -5,800 -119% 25,400 270,000 -10,800 -136% 20,400 265,000 -15,800 -153% 15,400 260,000 -20,800 -169% 10,400 255,000 -25,800 -186% 5,400 250,000 -30,800 -203% 400 249,600 -31,200 -204% 245,000 -35,800 -219% -4,600 -8% -16% -24% -33% -41% -48% -49% -58% -66% -74% -83% -91% .99% -100% -108% Admati example Blinder example1 # 2 - + 130% SASA Type here to search O A 20 ENG 11/24/2019 A Bart abuoun - X Comments Share 59% 51% 42% 34% 26% 17% 9% 4% 1% AutoSave Gon e assignment 1 fin 340 - Last Saved 11/21/2019 1:46 PM File Home Insert Page Layout Formulas Data Review View Help Acrobat Tell me what you want to do C25 - X fx AB 1 Cost of house Borrowing rate Down payment Amt. owed EOY house price Final equity1 ROE1%) Final equity2 ROE2 (%) 300,000 0.04 30,000 280,800 345,000 64,200 114% 95,400 60,000 249,600 340,000 59,200 97% 90,400 335,000 54,200 81% 85,400 150% 330,000 49,200 64% 80,400 325,000 44,200 47% 100% 75,400 320,000 39,200 31% 70,400 50% 315,000 34,200 14% 65,400 312.000 31,200 4% 62,400 0% 310,000 29,200 -3% 60,400 $ 50,000 100,000 150,000 200,000 250,000 394 po 350,000 400,000 305,000 24,200 -19% 55,400 -50% 300,000 19,200 -36% 50,400 100% 295,000 14,200 -53% 45,400 290,000 9,200 -69% 40,400 -150% 285,000 4,200 -86% 35,400 280,800 0 -100% 31,200 -200% 280,000 -800 -103% 30,400 250% 275,000 -5,800 -119% 25,400 270,000 -10,800 -136% 20,400 265,000 -15,800 -153% 15,400 260,000 -20,800 -169% 10,400 255,000 -25,800 -186% 5,400 250,000 -30,800 -203% 400 249,600 -31,200 -204% 245,000 -35,800 -219% -4,600 -8% -16% -24% -33% -41% -48% -49% -58% -66% -74% -83% -91% .99% -100% -108% Admati example Blinder example1 # 2 - + 130% SASA Type here to search O A 20 ENG 11/24/2019