Question

ROE = [r + (r – i) D/E] (1-t)

r = 20%

i = 15%

t = 40%

D/E	ROE
0	.12
1	.15
5	.27
10	.42

1) Use the Variance ROE formula (below) to compute the corresponding variance/s.d. for each D/E

Variance (ROE) = Var(r)(1+D/E)2 (1-t)2 <-- the 2s are squared.

2) Using Excel normal distribution function set up tables of probability vs. ROE for each d/e level.

3) Graph the different probability distributions for each d/e level in one chart.