Question: a. Assuming riskless debt, if the loan-to-value ratio is 80%, approximately how much more risk will there be in the equity return than if the LTV ratio were 60%? Put another way: If the return to equity can vary per year within a range of 0% with a 60% LTV ratio, then within what range can it vary with an 80% LTV ratio?
b. How much larger should the market's required risk premium be in the required return to equity with 80% debt as compared to 60% debt?