Question
You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks
You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wd) to only 10%. Both companies are small, so they are not subject to the interest deduction limitation. Other things held constant, and based on the data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROEHigher - ROELower? Do not round your intermediate calculations. (Hint: As a first step, use the information in the Operating Data to calculate EBIT ) Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 T)/Capital 16% Higher interest rate 13% Tax rate 25% Lower wd 10% Lower interest rate 9%
A. 6.34%
B. 8.35%
C. 6.84%
D. 8.26%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started