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 (wa) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th 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. Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 12.00% Higher interest rate 13% %3D Tax rate 25% Lower wd 10% Lower interest rate 9% a. 3.75% b. 2.22% C 2.80% d. 2.54% e. 1,87%
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 (wa) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th 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. Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 12.00% Higher interest rate 13% %3D Tax rate 25% Lower wd 10% Lower interest rate 9% a. 3.75% b. 2.22% C 2.80% d. 2.54% e. 1,87%
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 (wa) to only 10%. The
company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th
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.
Operating Data
Other Data
Capital
$4,000
Higher wd
60%
ROIC = EBIT(1 - T)/Capital
12.00%
Higher interest rate
13%
%3D
Tax rate
25%
Lower wd
10%
Lower interest rate
9%
a. 3.75%
b. 2.22%
C 2.80%
d. 2.54%
e. 1,87%
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