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a. What impact would the new capital structure have on the firm's net income, totál dollar return to investors, and ROE? b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a.

a. What impact would the new capital structure have on the firm's net income, totál dollar return to investors, and ROE? b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Seattle Health Plans currently uses zero debt financing. Its operating income it pays taxes at a 30 percent rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent. a. What impact would the new capital structure have on the firm's net income, totál dollar return to investors, and ROE? b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a. ANSWER a. 7 B 9 , 1 2 3 4 Balance Sheet Total assets Debt Common stock Total liabilities and equity Income Statement EBIT Interest expense Taxable income Taxes (30%) Net income Total dollar return to investors ROE 5 b. Stock Stock/Debt
Transcribed Image Text:Seattle Health Plans currently uses zero debt financing. Its operating income it pays taxes at a 30 percent rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent. a. What impact would the new capital structure have on the firm's net income, totál dollar return to investors, and ROE? b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a. ANSWER a. 7 B 9 , 1 2 3 4 Balance Sheet Total assets Debt Common stock Total liabilities and equity Income Statement EBIT Interest expense Taxable income Taxes (30%) Net income Total dollar return to investors ROE 5 b. Stock Stock/Debt
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