Cash flows from the assets must go either to debt or equity

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Reference no: EM131539424

Next? year, there are two possible values for its? assets, each equally? likely:$1,220 and $960. Its debt will be due with 5.1% interest. Because all of the cash flows from the assets must go either to the debt or the? equity, 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 38% in the? firm's debt and 62% 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.

Assets=$1,040

Liabilities? & Equity

Debt $400

Equity $640

Reference no: EM131539424

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