Consider a simple firm that has the following market-value balance sheet:

Assets		Liabilities & Equity
$1,010		Debt	$450
		Equity	560

Next year, there are two possible values for its assets, each equally likely: $1,190 and $960. Its debt will be due with 4.8% interest. Because all of the cash flows from the assets must go either to the debt or theequity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested

45% in the firm's debt and 55% in its equity will have the same expected return as the assets of the firm. That is, show that the firm's WACC is the same as the expected return on its assets.

If the assets will be worth $1,190 in one year, the expected return on assets will be

%.

(Round to one decimal place.)

If the assets will be worth $960 in one year, the expected return on assets will be

%.

(Round to one decimal place.)

The expected return on assets will be

%.

(Round to one decimal place.)

For a portfolio of 45% debt and 55% equity, the expected return on the debt will be

nothing%.

(Round to one decimal place.)

If the equity will be worth $718.40 in one year, the expected return on equity will be

%.

(Round to one decimal place.)

If the equity will be worth $488.40 in one year, the expected return on equity will be

%.

(Round to one decimal place.)

The expected return on equity will be

%.

(Round to one decimal place.)

The expected pre-tax return on a portfolio of 45% debt and 55% equity will be

%.

(Round to one decimal place. There may be a slight difference due to rounding.)