Question
Robertson Steel is forecasting the following numbers: EBIT $1,000,000 Interest Expense300,000 ROE20% The company is in the 40 percent tax bracket.After putting together the forecast
Robertson Steel is forecasting the following numbers:
EBIT $1,000,000
Interest Expense300,000
ROE20%
The company is in the 40 percent tax bracket.After putting together the forecast the company is considering a proposal from its CFO (Chief Financial Officer) which calls for an increase in the company's debt ratio.If the CFO's policy is adopted, the company will reduce common equity by 25 percent and increase its interest expense by 20 percent.What will be the company's forecasted ROE if the company adopts the CFO's recommendation?(Assume that the change in financing has no impact on EBIT.)
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