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:

Not-For-Profit Organization

An organization that operates for purposes other than making a profit, such as charity, education, or social causes.

Strongest Selling Point

A unique feature or aspect that makes a product or service stand out from competitors.

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An individual who has completed a course of study at a college or university and received a degree.

Upper-Level Manager

A high-level executive who is responsible for overseeing the strategic direction and decision-making within an organization.