You work for the CEO of a new company that plans to acquire long-forgotten songs, like Lets Do Something Cheap and Superficial, and promote them to increase their popularity to earn royalties. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $400,000. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROE_L ROE_U?

	0% Debt, U	60% Debt, L
Oper. income (EBIT)	$400,000	$400,000
Required investment	$2,500,000	$2,500,000
% Debt	0.0%	60.0%
$ of Debt	$0.00	$1,500,000
$ of Common equity	$2,500,000	$1,000,000
Interest rate	NA	10.00%
Tax rate	35%	35%

a. 5.85%

b. 6.14%

c. 6.45%

d. 6.77%

e. 7.11%