Your firm's debt ratio is only 5.00%, but the new CFO thinks that more debt should be employed. She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd . Other things held constant, and based on the data below, if the firm increases the percentage of debt in its capital structure (wd) 60.0%, by how much would the ROE change, i.e., what is ROE - ROE? Operating Data Other Data Capital $150,000 Old 5% ROIC = EBIT (1 - T)/Capital 13.00% Old interest ratio 10% Tax rate 35% New 60% New interest rate 12%
Your firm's debt ratio is only 5.00%, but the new CFO thinks that more debt should be employed. She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd . Other things held constant, and based on the data below, if the firm increases the percentage of debt in its capital structure (wd) 60.0%, by how much would the ROE change, i.e., what is ROE - ROE? Operating Data Other Data Capital $150,000 Old 5% ROIC = EBIT (1 - T)/Capital 13.00% Old interest ratio 10% Tax rate 35% New 60% New interest rate 12%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Your firm's debt ratio is only 5.00%, but the new CFO thinks that more debt should be employed. She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd . Other things held constant, and based on the data below, if the firm increases the percentage of debt in its capital structure (wd) 60.0%, by how much would the ROE change, i.e., what is ROE - ROE?
|
Operating Data
|
Other Data
|
|||
| Capital |
$150,000
|
Old |
5%
|
|
|
13.00%
|
Old interest ratio |
10%
|
||
| Tax rate |
35%
|
New |
60%
|
|
| New interest rate |
12%
|
|||
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