A firm, which is just being established, needs 1,000,000 of assets, and it expects to have a basic earning power ratio of 20%. The firm will own no securities, so all of its income will be operating income. If it chooses to, it can finance up to 50% of its assets with debt, which will have an 8% interest rate. The tax rate on all taxable income is 30%.

a) Determine the firms financials and complete the table, assuming the firm is financed with 50% debt and 50% common equity.

b) Determine the firms financials and complete the table, assuming the firm is financed with 100% equity and 0% debt.

c) What is the difference between its expected return on equity (ROE) if the firm finances with 50% debt versus its expected ROE if it finances entirely with common equity?

Company's Expected Financial Data Assuming 50\% Debt Financing \begin{tabular}{|l|l|} \hline Earnings before interest and tax & \\ \hline Debt & \\ \hline Debt charge (interest expense) & \\ \hline Earnings before tax & \\ \hline Taxes & \\ \hline Net income & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline \multicolumn{2}{|c|}{ Company's Expected Financial Data Assuming 100% Equity Financing } \\ \hline Earnings before interest and tax & \\ \hline Debt & \\ \hline Debt charge (interest expense) & \\ \hline Earnings before tax & \\ \hline Taxes & \\ \hline Net income & \\ \hline \end{tabular}