1. You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $510,000. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROEL - ROEU? Do not round your intermediate calculations.

	0% Debt, U		60% Debt, L
Oper. income (EBIT)	$510,000		$510,000
Required investment	$2,500,000		$2,500,000
% Debt	0.0%		60.0%
$ of Debt	$0.00		$1,500,000
$ of Common equity	$2,500,000		$1,000,000
Interest rate	NA		10.00%
Tax rate	35%		35%

a. 10.14%

b. 8.11%

c. 7.10%

d. 12.68%

e. 10.65%