1. Start with the risk-adjusted discount rate formula. Derive the certainty equivalent formula by rearranging terms and noting that b = β × PV.
2. In Section 11.3's illustration, asset values increased 10 percent from 2001 to 2002, from $100 million to $110 million.
a. Compute the percentage increase in the value of equity if the firm is financed with $50 million in debt. b. Compute the leverage ratio of this firm in 2002