For a levered firm where b_A = beta of assets and b_D = beta of debt, the return on equity (r_E)is equal to A)r_E = r_A. B)r_E = r_A + (D/E)× [r_A − r_D] C)r_E = r_A + (D/(D +E))× [r_A - r_D] D)None of these options.

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Quizplus · Accepted Answer

The return on equity for a levered firm can be calculated using the formula: $r_E = r_A + (D/E) \times [r_A - r_D]$, where $r_E$ is the return on equity, $r_A$ is the return on assets, $r_D$ is the return on debt, and $D/E$ is the debt-to-equity ratio. This formula is derived from the Modigliani-Miller theorem on capital structure, which shows how leverage affects a firm's cost of equity.

For a Levered Firm Where BA = Beta of Assets

For a Levered Firm Where B_A = Beta of Assets