Homework Answers
Initial investment = $ 20,000
Equity proportion @20% = 20000*20%
= $4,000
Debt proportion @80% = 20000*80%
= $16,000
Cash flow at the end of the year (One time i.e no further cash flows) = $25,000
Profit earned during the year = Cash flow - initial investment
= $25,000 - $20,000
EBIT = $5,000
Interest (cost of debt) @4% = $640 (i.e 16,000 * 4%)
Note : Tax (Not given)
So, net income earned during the year = $5,000 - $640
= $4,360
Return on levered equity = Net income earned * Equity value / Total value
= 4,360 * 4,000 / 20,000
= 21%
Option "E" is correct.
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