Question
A firm faces a 21 percent tax rate and has $700m in assets, currently financed entirely with equity. Equity is worth $100 per share, and
A firm faces a 21 percent tax rate and has $700m in assets, currently financed entirely with equity. Equity is worth $100 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $100m. The firm is considering switching to a 46 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. How much will ROE change if they switch to the proposed capital structure? (Give your answer in decimal number, not percentage; and to 6 decimal places, e.g. 0.123456 )
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