A firm has a debt/equity ratio of ½.The debt pays a 6% rate of interest.The expected rate of return on equity is 12%.What would happen to the expected rate of return if the firm reduced its debt/equity ratio to 1/3?
A) Rate of return would increase to 11.33%
B) Rate of return would increase to 12.50%
C) Rate of return would decrease to 10.60%
D) Rate of return would decrease to 8.33%
Correct Answer:
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