Using the Binomial Model, find the values of a firm's levered equity (E_L), and the expected return on the equity, r_LE, given the following values: V=100, u=1.3, d=1/u, p=0.7, r_f=5%, X=100, and T=3.
$\begin{array}{cc}&\mathrm{E}_{\mathrm{L}} & { }^{\mathrm{1'}_{\mathrm{LE}}} \\a.&32.34 & 6.92 \% \\b.&32.34 & 10.74 \% \\c.&18.96 & 6.92 \% \\d.&18.96 & 10.74 \%\end{array}$

Question

Using the Binomial Model, find the values of a firm's levered equity (E_L), and the expected return on the equity, r_LE, given the following values: V=100, u=1.3, d=1/u, p=0.7, r_f=5%, X=100, and T=3.

\begin{array}{cc}&\mathrm{E}_{\mathrm{L}} & { }^{\mathrm{1'}_{\mathrm{LE}}} \\a.&32.34 & 6.92 \% \\b.&32.34 & 10.74 \% \\c.&18.96 & 6.92 \% \\d.&18.96 & 10.74 \%\end{array}

Quizplus · Accepted Answer

The Answer is D

Using the Binomial Model, Find the Values of a Firm's