A firm requires an investment of $20,000 and will return $25,000 after one year. If the firm borrows $10,000 at 7% what is the return on levered equity?

Question

Quizplus · Accepted Answer

The levered equity is the return on investment after deducting the cost of borrowing.

The cost of borrowing is $10,000 x 7% = $700

The return on investment after deducting the cost of borrowing is $25,000 - $20,000 - $700 = $4,300

The return on levered equity is:

$4,300 / $10,000 = 0.43 or 43%

Therefore, the best choice is C, with a return on levered equity of 43%.

A Firm Requires an Investment of $20,000 and Will Return