Booths Recap is currently an all equity financed firm. It expects to generate EBIT of

$20

million over the next year. Currently it has 8 million shares outstanding and its stock is trading at

$20.00

per share.\ One of its large institutional investors (Miller Funds) proposed the board of directors to change its capital structure by borrowing

$50

million at an interest rate of

8%

and using the proceeds to repurchase shares.\ Assume perfect capital market with no taxes and no financial distress costs, what would be return on equity?

Booths Recap is currently an all equity financed firm. It expects to generate EBIT of $20 million over the next year. Currently it has 8 million shares outstanding and its stock is trading at $20.00 per share. One of its large institutional investors (Miller Funds) proposed the board of directors to change its capital structure by borrowing $50 million at an interest rate of 8% and using the proceeds to repurchase shares. Assume perfect capital market with no taxes and no financial distress costs, what would be return on equity