Last year, K9 WebbWear, Inc., reported an ROE of 20 percent. The firms debt ratio was 55

Question:

Last year, K9 WebbWear, Inc., reported an ROE of 20 percent. The firm’s debt ratio was 55 percent, sales were $20 million, and the capital intensity was 1.25 times. Calculate the net income and profit margin for K9 WebbWear last year. This year, K9 WebbWear plans to increase its debt ratio to 60 percent. The change will not affect sales or total assets however it will reduce the firm’s profit margin to 11 percent. By how much will the change in K9 WebbWear’s debt ratio affect its ROE?