Assume the probability distributions for ( R ) and ( R_{T}^{*} ) are normal and you are given the following information.
[
ar{R}_{mathrm{T}}^{*}=7 % quad sigmaleft(mathrm{R}_{mathrm{T}}^{*}
ight)=4 % quad au=.40
]
Management is considering a capital structure with ( mathrm{L}=.50 ). With this capital structure, ( mathrm{k}_{mathrm{d}} ) will be ( 10 % ) and ( mathrm{k}_{mathrm{e}} ) will be ( 15 % ). What is the probability of achieving an ( R ) greater than ( mathrm{k}_{mathrm{e}} ) ?
Suppose management wants the probability from part a to be ( 72 % ). With everything else equal, what would the necessary increase in ( ar{R}_{T}^{*} ) have to be to get a ( 72 % ) chance of having ( mathrm{R} ) greater than ( mathrm{k}_{mathrm{e}} ) ?
