22. [Relationship of ROE, ROA, leverage, and cost of debt] The Vac Company has an ROA of 10%. The company has no debt (not even trade habilities). Its total assets are $1 million and its tax rate is 20%. The company is considering borrowing some money and using the proceeds to buy back outstanding stock. The bank has stated that the interest rate charged will depend on the level of bank debt according to the following schedule: Interest Rate Debt to Equity (1) 0.25 6% (2) 0 50 8% (3) 1.00 10% (4) 1.50 12% (5) 2.00) 15%

a. Compute the company's current ROE.

b. Using the formula in the chapter that related ROE to ROA and interest costs, calculate the expected ROE for each level of debt.

c. Confirm your calculation of cases (1) and (5) by completing the following for each case: (i) Debt in dollars (ii) Equity in dollars (iii) Income before interest and taxes