Using the Binomial Model, Find the Values of a Firm's

question 1

Short Answer

Using the Binomial Model, find the values of a firm's levered equity (E_L), and the expected return on the equity, r_LE, given the following values: V=100, u=1.3, d=1/u, p=0.7, r_f=5%, X=100, and T=3.
$\begin{array}{cc}&\mathrm{E}_{\mathrm{L}} & { }^{\mathrm{1'}_{\mathrm{LE}}} \\a.&32.34 & 6.92 \% \\b.&32.34 & 10.74 \% \\c.&18.96 & 6.92 \% \\d.&18.96 & 10.74 \%\end{array}$

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Definitions:

Factors of Production

The inputs used in the production of goods or services, including land, labor, capital, and entrepreneurship.

Economic Resources

Inputs used in the production of goods and services, including land, labor, capital, and entrepreneurship.

Consumption Goods

Goods that are used by consumers for personal use and satisfaction, not for production or investment.

Lollipops

A hard candy on a stick.