Return on Equity

Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 30%. CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 45% of its assets with debt, which will have an 9% interest rate. Assuming a 40% tax rate on all taxable income, what is the difference between CCC's expected ROE if it financeswith 45% debt versus its expected ROE if it finances entirely with common stock? Round your answer to two decimal places.

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Midwest Packaging's ROE last year was only 3%; but its management has developed a new operating plan that calls for a debt-to-assets ratio of 45%, which will result in annual interest charges of $444,000. The firm has no plans to use preferred stock. Management projects an EBIT of $960,000 on sales of $12,000,000, and it expects to have a total assets turnover ratio of 2.5. Under these conditions, the tax rate will be 40%. If the changes are made, what will be the company's return on equity? Round your answer to two decimal places.

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