What is the expected return on assets

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You need to raise $1M in cash to finance a one-year investment opportunity. The investment opportunity pays $1.5M in cash next year if economic conditions are good (50% probability). Otherwise, the investment opportunity pays $900K in cash if economic conditions are bad (50% probability). Assume a risk-free rate of 5% and no taxes.

Suppose that you raise $1M in cash by issuing $800K in equity and $200K in debt. The expected return on debt equals the risk-free rate because the proceeds from the project can repay the debt plus interest, regardless of the state of the economy. What is the expected return on equity? What is the expected return on assets?

Reference no: EM132698054

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