Firm XYZ Is Currently Financed Entirely with Equity

question 9

Multiple Choice

Firm XYZ is currently financed entirely with equity.The market value of the firm's assets and equity is V_U=E_U=500, and the expected return on the firm's assets and equity is r_A=r_E=12.5%.Suppose the firm issues debt with a value of D_L= 200, and uses the proceeds to retire equity.The market value of the firm remains the same, V_L=E_L+D_L=500.If the expected return on the debt is r_D=7%, what is the expected return on the firm's levered equity?

• A)15.33%
• B)18.20%
• C) 20.33%
• D)23.00%

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Definitions:

Predictor Variable

A variable in research that is believed to influence or forecast changes in another variable or outcome.

Dependent Variable

In research and experiments, the variable that is being tested and measured, expected to change as a result of manipulations to the independent variable.

Path-Goal Theory

A leadership theory that suggests leaders should adjust their style to fit the employee's and task's needs to achieve a goal.

Task Characteristics

The attributes or features inherent in work-related activities that affect how they are perceived and performed.