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Leverage problem PLEASE EXPLAIN THE SOLUTION, GIVE THE DETAIL THANK YOU.

Consider a house valued initially at \$50,000. After purchase, the house value rises to \$60,000. Calculate ROA and ROE assuming:

a. Cash purchase

solution: (ROA= 20%; ROE = 20%)

b. 20% down payment and borrowing the rest

solution: (ROA= 20%; ROE = 100%)

c. 10% down and borrowing the rest.

solution: (ROA= 20%; ROE = 200%)

d. Assume instead that after purchase the house value falls from \$50,000 to \$35,000. Calculate ROA and ROE assuming the different financing arrangements in a through c.

a. (ROA= -30%; ROE = -30%)

b. (ROA= -30%; ROE = -150%)

c. (ROA= -30%; ROE = -300%)

Leverage problem

Consider a house valued initially at \$50,000. After purchase, the house value rises to \$60,000.

Calculate ROA and ROE assuming:

a. Cash purchase

Solution: (ROA= 20%; ROE = 20%)

b....

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This question was answered on: Sep 18, 2020

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