OFC [5]

Old Fashion Corp. is an all-equity firm famous for its antique furniture business. If the firm uses 36% leverage through issuance of long-term debt, the CFO predicts that there is a 20% chance that the ROE(Return on Equity) will be 10%, 40% chance that the ROE will be 15%, and 40% chance that the ROE will be 20%. The firm is tax-exempt. Explain whether the firm should change its capital structure if the forecast of the CFO changes to 30%, 50% and 20% chances respective for the three ROE possibilities. That is, tell us whether the value of assets and equity change as a result of the changes in ROEs.