2 Write a brief report to the management of Sapphire explaining why the return on equity has changed as a result of restructuring. (20 marks)

Sapphire is an all-equity financed company, which is valued at €250 million. The firm’s shares are expected to produce a return of 15 per cent. The company has decided to modify its capital structure to capture the tax benefits of debt. The plan is to have a target debt/equity ratio of 25 per cent. The company has been told that any borrowings it makes will attract a rate of 7 per cent.