Question: Given the following information about a farm business:
| Debt-to-equity ratio |
2.0 |
| Expected return on assets |
12% |
| Expected interest rate on debt |
8% |
| Consumption rate |
60% |
| Tax rate |
20% |
| Standard deviation of return on assets |
4% |
| Standard deviation of interest rate |
2% |
a. What is the expected rate at which this firm could grow?
b. What might the manager do to increase the rate of growth?
c. What level of risk is associated with the rate of growth found in a?
d. Suppose another lender allows a maximum debt-to-equity ratio of 2.5, with an interest rate of 9% and a standard deviation of 4%. How do expected growth and risk for these conditions compare with the terms cited above?