Consider a simple firm that has the following? market-value balance? sheet: Assets Liabilities end equity $...

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Consider a simple firm that has the following? market-valuebalance? sheet: Assets Liabilities end equity $ 1 020 Debt $ 430Equity 590 Next? year, there are two possible values for its?assets, each equally? likely: $ 1 200 and $ 970. Its debt will bedue with 4.8 % interest. Because all of the cash flows from theassets must go to either the debt or the? equity, if you hold aportfolio of the debt and equity in the same proportions as the?firm's capital? structure, your portfolio should earn exactly theexpected return on the? firm's assets. Show that a portfolioinvested 42 % in the? firm's debt and 58 % in its equity will havethe same expected return as the assets of the firm. That? is, showthat the? firm's pre-tax WACC is the same as the expected return onits assets.

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Consider a simple firm that has the following? market-valuebalance? sheet: Assets Liabilities end equity $ 1 020 Debt $ 430Equity 590 Next? year, there are two possible values for its?assets, each equally? likely: $ 1 200 and $ 970. Its debt will bedue with 4.8 % interest. Because all of the cash flows from theassets must go to either the debt or the? equity, if you hold aportfolio of the debt and equity in the same proportions as the?firm's capital? structure, your portfolio should earn exactly theexpected return on the? firm's assets. Show that a portfolioinvested 42 % in the? firm's debt and 58 % in its equity will havethe same expected return as the assets of the firm. That? is, showthat the? firm's pre-tax WACC is the same as the expected return onits assets.