A local entrepreneur is looking for investors in a new company that will develop mobile apps for behavioral health. The company requires $15 million in start-up funds. It can be capitalized with 100 percent equity financing or with 30 percent debt and 70 percent equity. EBIT is $3 million, and the company will pay taxes at a rate of 30 percent. Debt financing would bear an interest rate of 7 percent.

a. What would be the firm’s net income, total dollar return to investors, and ROE with 100 percent equity financing?

b. What would be the firm’s net income, total dollar return to investors, and ROE with 30 percent debt financing and 70 percent equity financing?

c. What factors should the investors consider when deciding on the appropriate capital structure?