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?
A)43%
B)29%
C)37%
D)39%

Question

Quizplus · Accepted Answer

The return on levered equity is calculated as follows: The total return is $25,000 - $20,000 = $5,000. The interest on the borrowed $10,000 at 7% is $700. The net return to equity is $5,000 - $700 = $4,300. The equity investment is $10,000 (since $10,000 is borrowed). The return on levered equity is $4,300 / $10,000 = 43%.

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