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?

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The Answer of 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?

Firm XYZ Is Currently Financed Entirely with Equity