Texas health plans currently use zero-debt financing. Its operating income (earnings before interest & taxes or EBIT) is $1 million, it pays taxes at 40% rate. It has $5 million in assests & because all its equity is financede, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interst rate of 8%

(a)what impact would the new capital structure have on the firm's net income, total dollar return to investors and ROE?

(b) Redo the analysis, but now asume that the debt financing would cost 15%?

(c) return to the initial 8% interst rate. Now assume that EBIT could be as low as $500,000 (with probability of 20%) or as high as $1.5 million (with probability of 20%). There remains a 60% chance that EBIT would be $1 million. Redo the analysis for each level of EBIT, & find the expected values for the firm's net income, total dollar return to investors & ROE. What lession about capital structure and risk does this illistration provide?