Question
Last year ABC Company had $203,952 of assets, $25,828 of net income, and a debt-to-total-assets ratio of 33%. Now suppose the new CFO convinces the
Last year ABC Company had $203,952 of assets, $25,828 of net income, and a debt-to-total-assets ratio of 33%. Now suppose the new CFO convinces the president to increase the debt-to-total assets ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE (that is, new ROE - old ROE)? Round your final answer to two decimal places of percentage (%), but do not enter % in your answer, e.g., x.xx. (Hint: ROE = net income/common equity)
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