An all equity firm has a return on assets (ROA) of 14.20 percent. The firm makes the decision to replace 30% of its equity with debt that has a before-tax cost of 8 percent (the firm's tax rate is 40 percent). Calculate the firm's new ROE after the debt has been issued and equity has been repurchased (hint: leverage effect and tax shield effect). O 17.37% O 17.66% 17.94% 18.23% 18.51%
An all equity firm has a return on assets (ROA) of 14.20 percent. The firm makes the decision to replace 30% of its equity with debt that has a before-tax cost of 8 percent (the firm's tax rate is 40 percent). Calculate the firm's new ROE after the debt has been issued and equity has been repurchased (hint: leverage effect and tax shield effect). O 17.37% O 17.66% 17.94% 18.23% 18.51%
Chapter7: Types And Costs Of Financial Capital
Section: Chapter Questions
Problem 11EP
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![An all equity firm has a return on assets (ROA) of 14.20 percent. The firm makes the
decision to replace 30% of its equity with debt that has a before-tax cost of 8 percent (the
firm's tax rate is 40 percent). Calculate the firm's new ROE after the debt has been issued
and equity has been repurchased (hint: leverage effect and tax shield effect).
O 17.37%
O 17.66%
17.94%
18.23%
O 18.51%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F297d6b18-73a7-4fab-be76-bacb5189a5da%2F0da42a5b-b021-448c-b105-04893e2e24dd%2Fpu2nmxn_processed.jpeg&w=3840&q=75)
Transcribed Image Text:An all equity firm has a return on assets (ROA) of 14.20 percent. The firm makes the
decision to replace 30% of its equity with debt that has a before-tax cost of 8 percent (the
firm's tax rate is 40 percent). Calculate the firm's new ROE after the debt has been issued
and equity has been repurchased (hint: leverage effect and tax shield effect).
O 17.37%
O 17.66%
17.94%
18.23%
O 18.51%
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