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:

Standard Cost Cards

Documentation that records the expected costs of materials, labor, and overhead for a product, used for budgeting and performance evaluation.

Work in Process

Work in Process (WIP) is an account used in inventory accounting that tracks the cost of materials and labor for products that are at various stages of production but are not yet completed.

Overhead Controllable Variance

The difference between actual and budgeted overhead costs that is directly manageable or controllable by management.

Fixed Overhead

Indirect costs of production that are not affected by the volume of production, such as rent, salaries, and utilities.