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In a company where all debts are interest-bearing, the following information is obtained: Return on capital employed 10% Debt interest 4% Debt / equity ratio

In a company where all debts are interest-bearing, the following information is obtained:

Return on capital employed 10%

Debt interest 4%

Debt / equity ratio 2

A. Calculate the return on equity (Re)

B. If the debt / equity ratio changes to 4, how big will Re be?

C. Explain why Re changes if the debt / equity ratio changes.

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