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3 Beachfront Physicians, a medical group practice, is just being formed. It will need $2 million of total 4 assets to generate $3 million in

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3 Beachfront Physicians, a medical group practice, is just being formed. It will need $2 million of total 4 assets to generate $3 million in revenues. Furthermore, the group expects to have a profit margin of 55%. The group is considering two financing alternatives. First, it can use all-equity financing 6 by requiring each physician to contribute his or her pro rata share. Alternatively, the practice can 7 finance up to 50% of its assets with a bank loan. Assuming that the debt alternative has no 8 impact on the expected profit margin, what is the difference between the expected ROE if the group 9 finances with 50% debt versus the expected ROE if it finances entirely with equity capital? 10 11 12 13

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