1.) Last year a company had sales of $560,000, operating costs of $336,000, and year-end assets of $725,000. The debt-to-total-assets ratio was 25%, the interest rate on the debt was 4%, and the tax rate was 25%. The new CFO wants to see how the ROE would have been affected if the firm had used a 30% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. How much would the ROE change in terms of percentage points in response to the change in the capital structure?

a.) 6.29% increase

b.) 1.76% increase

c.) 1.92% increase