Cash Flow

Required rate of return for common stocks $=11\%$

Required rate of return for preferred stocks $=8\%$

Required rate of return for debt $=5\%$

Target capital structure: $60\%$ common stock, $35\%$ debt and $5\%$ preferred stocks

Tax Rate $=35\%$

Problem $1$:

a$)$ Compute the ROE of the firm in $2014$

b$)$ Compute the ROE in $2014$ if money was raised only through equity

c$.$ Compute the ROE in $2014$ if the firm has $15\%$ of debt instead. We suppose that the interest payment will be the

same as the current interest payment plus or minus $0\mathrm{.}8\%$