Seattle Health Plans currently uses zero-debt financing. Its operating profit is $1 million, and it pays taxes at a 25 percent rate. It has $8 million in assets and, because it is all-equity financed, $8 million in equity. Suppose the firm is considering replacing 55 percent of its equity financing with debt financing that bears an interest rate of 6 percent.

What impact would the new capital structure have on the firm's profit?

What impact would the new capital structure have on the firm's ROE (return on equity)?