Mathematical Review - Earlham College

The expected return on Locomotive’s levered equity is 16% before the stock repurchase plan is announced. c. According to Modigliani-Miller Proposition II (No Taxes): rS = r0 + (B/S)(r0 – rB) where r0 = the expected return on the assets of an all-equity firm. rS = the expected return on the equity of a levered firm. rB = the pre-tax cost of debt ................
................