Question
Seattle Health Plans currently uses zero-debt financing. Its operating profit is $5 million, and it pays taxes at a 23 percent rate. It has $15
Seattle Health Plans currently uses zero-debt financing. Its operating profit is $5 million, and it pays taxes at a 23 percent rate. It has $15 million in assets and, because it is all-equity financed, $15 million in equity. Suppose the firm is considering replacing 35 percent of its equity financing with debt financing that bears an interest rate of 10 percent. What impact would the new capital structure have on the firm's profit?
(Enter your answer in millions of dollars, rounded to 2 decimal places. If profit would increase, enter your answer as a positive number. If profit would decrease, enter your answer as a negative number. Do not include $ sign or commas. For example a decrease in profit of $1.234 million dollars would be entered as -1.23.)
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