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Complete the following table for the expected rate of return on equity for different rates of profit (p) on combined debt and equity and levels of primary gearing assuming that the rate of interest on debt is 10%. (Show your workings in full)
Debt/Equity Ratio Expected Rate of Return on Equity
(Gearing) p=5% p=10% p=15%
0.5 ? ? ?
1.5 ? ? ?
2.5 ? ? ?
What can you conclude about the impact of primary gearing on the variability of the return on equity?
