2.8

eBook Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have a basic earning power ratio of 35%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 25% of its assets with debt, which will have a 12% 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 25% debt versus its expected Rot if it finances these assets entirely with common stock? Round your answer to two decimal places. percentage points