Next year, there are two possible values for its assets, each equally likely: $1 190...
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Finance
Next year, there are two possible values for its assets, each equally likely:
$1 190
and
$970.
Its debt will be due with
4.9%
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
39%
in the firm's debt and
61%
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
39%
debt and
61%
equity, the expected return on the debt will be
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