Question
Last year, Isla Company had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate
Last year, Isla Company had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new Chief Financial Officer wants to see how the Return on Equity would have been affected if the firm had used a 45% debt ratio. If the sales and total assets will not be affected, and that the interest rate and tax rate would both remain constant, by how much would the Return on Equity change (increase or decrease in percentage) in response to the change in the capital structure?
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