4-16 RETURN ON EQUITY Commonwealth Construction (CC) needs $3 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 30% 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 40% tax rate on taxable income, what is the difference between CCs expected ROE if it finances these assets with 30% debt versus its expected ROE if it finances these assets entirely with common stock?