Your firm is 50% debt financed and your debt beta is 1.2. The remainder of the...

 

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Your firm is 50% debt financed and your debt beta is 1.2. The remainder of the firm is financed with equity, which has a standard deviation of expected returns of 40%. The risk free rate is 5%, the market risk premium is 8%, and market returns have a standard deviation of 14%. The correlation between the market returns and your debt and equity are 0.8 and 0.7, respectively. Assuming the MM theorem holds, what is the expected returns on your firms assets? 15.2% 14.2% None of the above 16.2% Your firm is 50% debt financed and your debt beta is 1.2. The remainder of the firm is financed with equity, which has a standard deviation of expected returns of 40%. The risk free rate is 5%, the market risk premium is 8%, and market returns have a standard deviation of 14%. The correlation between the market returns and your debt and equity are 0.8 and 0.7, respectively. Assuming the MM theorem holds, what is the expected returns on your firms assets? 15.2% 14.2% None of the above 16.2%

Answer rating: 100% (QA)

Solution 1 Cost of debt Risk Free rate Debt beta x ... View the full answer