Given the following information about a farm business:
Debt-to-Asset ratio 0.20
Expected return on assets 9%
Expected interest rate on debt 6%
Consumption rate 40%
Average income tax rate 25%
Standard deviation of return on assets 3%
1. What is the expected rate at which the firm should grow equity?
2. Compute the standard deviation of the rate of growth found above.
3. Demonstrate how increasing leverage such that the debt-to-asset ratio is now 0.70 influences both the expected growth and the variability in that growth. Use your quantitative results to confirm or refute the claim that increases in leverage lead to increased risk faced by the firm.