medium · CFA Level I alts
Pinion Logistics is being modeled in a leveraged buyout. If the transaction uses 60% debt and 40% equity, and the debt carries a 7.0% interest rate while the asset yield (EBIT/Enterprise Value) is 10.0%, the use of leverage is most likely to:
- Have no effect on the return on equity per the Modigliani-Miller theorem
- Increase the return on equity via positive leverage
- Decrease the return on equity due to high interest costs
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