Question

Asked Nov 27, 2019

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What is the size of debt for each firm?

Assume that cost of debt = 8%; unlevered cost of capital = 10%; systematic risk of the asset is 1.5

Step 1

The firm with zero debts can be said as unlevered firm. This is so because these firm do not have financial leverage which only generated if firm borrow money from investors.

Step 2

The debt for levered firm i...

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