16. Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 40% of its assets with debt, which will have an 8% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 25% tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 40% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places.

percentage points

17.

Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16, as you think about 4-17.)

1. If a firms expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firms expected return on common equity (ROE).
2. The higher a firms tax rate, the lower its BEP ratio, other things held constant.
3. The higher the interest rate on a firms debt, the lower its BEP ratio, other things held constant.
4. The higher a firms debt ratio, the lower its BEP ratio, other things held constant.
5. Statement a is false, but statements b, c, and d are true.

19. The Stewart Company has $1,694,000 in current assets and $711,480 in current liabilities. Its initial inventory level is $406,560, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest dollar.