Derive the certainty equivalent formula

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Reference no: EM131420929

1. Start with the risk-adjusted discount rate formula. Derive the certainty equivalent formula by rearranging terms and noting that b = β × PV.

2. In Section 11.3's illustration, asset values increased 10 percent from 2001 to 2002, from $100 million to $110 million.

a. Compute the percentage increase in the value of equity if the firm is financed with $50 million in debt.

b. Compute the leverage ratio of this firm in 2002

Reference no: EM131420929

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