Question

You are a business analyst with a big investment bank, and you are evaluating the equity risk, business risk, and financial risk of Abilon's Inc. You went online and found that the industry consensus on Abilon's equity risk is 1.5. You also know that the company's debt-equity ratio is 2. What is Abilon's estimated business and financial risk based on the model: ?E = ? A(1 + D/E)?

Answer 1

Given Equity Risk of Abilon's = 1.5

Company's Debt-Equity Ratio = 2

Then, According to the model given in the problem i.e. E = A(1+D/E)

E = 1.5

D/E = 2

A = ?

1.5 = A(1+2)

A = 1.5/2

A= 0.5 % risk