Suppose a firm determines that it has the ability to increas

Suppose a firm determines that it has the ability to increase its debt level while still able to maintain a 12% return on assets. If the firm increases it\'s debt as a percentage of its total assets from 25% to 40%. What is the expected return on equity?

Solution

Return on equity = Total equity wieght * return on total assets

Totall equity weight = 100 % -40 %

= 60%

Expected return on equity = 12 % * .60

= 7.2 %