Answer: 5.73%

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10. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROEL - ROEU?

0% Debt, U 55% Debt, L

Oper. income (EBIT) $450,000 $450,000

Required investment $3,000,000 $3,000,000

% Debt 0.0% 55.0%

$ of Debt $0.00 $1,650,000

$ of Common equity $3,000,000 $1,3500,000

Interest rate NA 8.00%

Tax rate 33% 33%