Apples ROE last year was only 5%; but its management has developed a new operating plan that calls for a debt ratio of 55%. This new debt ratio will result in annual interest charges of $270,000. Management projects an EBIT of $775,000 on sales of $7,250,000, and it expects to have a total assets turnover ratio of 2.5. The tax rate will be 25%.

1. What will be Apples new ROE if the above changes are implemented? And what is the change in Apples ROE as a result of this increase in debt?

2. In order to achieve a higher ROE above, Apple took on a debt ratio of 55%, which was higher than the firm previously had. Given what you have learned, is this a good idea? Why or why not?