Capital Structure Decisions Consider the following scenario: You are the Comptroller for a healthcare organization and you are tasked with analyzing potential scenarios regarding their funding. Problem #1: Changing Debt & Interest Rates They have an operating income of 1,500,000 SAR They have assets of 7,500,000 SAR The Tax rate is 22.5% They currently do not have any debt but are considering the following scenarios:

Scenario A Interest rate 9.5% B1 increase debt to 2,500,000 SAR B2 increase debt to 5,000,000 SAR Scenario B Interest rate 12.5% B1 increase debt to 2,500,000 SAR B2 increase debt to 5,000,000 SAR

Based on the above information, address the following questions: Compare Scenario A (increasing debt 9.5% interest rate) to Scenario B (increasing debt 12.5% interest rate) a. What impact does the higher interest rate have on the taxable income? b. What impact does the higher interest rate have on the net income? c. What impact does the higher interest rate have on the dollar return to investors?