Problem #1: Suppose a firm determines that it has the ability to increase its debt level while still able to maintain a 12% Return on Assets. If the firm increases its debt as a percent of its total assets from 25% to 40%, what is the expected Return on Equity? Problem #2: "If a company's total assets are financed 55% by debt, this indicates a high level of financial risk." Briefly evaluate the validity of this statement. Problem #3: Company A (100% equity) is valued at $15,000,000 and Company B (which has $3,000,000 in long debt with an interest rate of 8%). The tax rate is 30%. Both A & B have identical after-tax profit $1,200,000 and it is given that both have identical operating risk profile and identical pretax income. Assume ReA should is 12%. Calculate: 1. Value of B 2. Capital Structure Mix of B 3. Cost of capital for A & B

Problem #1: Suppose a firm determines that it has the ability to increase its debt level while still able to maintain a 12% Return on Assets. If the firm increases its debt as a percent of its total assets from 25% to 40%, what is the expected Return on Equity? Problem #2: "If a company's total assets are financed 55% by debt, this indicates a high level of financial risk." Briefly evaluate the validity of this statement. Problem #3: Company A (100% equity) is valued at $15,000,000 and Company B (which has $3,000,000 in long debt with an interest rate of 8%). The tax rate is 30% Both A & B have identical after-tax profit $1,200,000 and it is given that both have identical operating risk profile and identical pretax income. Assume ReA should is 12%. Calculate: 1. Value of B 2. Capital Structure Mix of B 3. Cost of capital for A & B