Houston Health insurance company currently adopts a zero-debt financing. Its operating income (EBIT) is $2 million, and its tax bracket is at the 40 percent rate. It has 6 million in assets and because it is all-equity financed (i.e., 6 million in equity). If the firm now is considering replacing half of its equity financing with debt financing beginning an interest rate of 10% A. What impact would the new capital structure have on the firm's net income, total dollar return to investor, and ROE? (10 points) B. Redo the analysis, but now assume that the debt financing would cost 20% (interest rate =20%) 

Answer rating: 100% (QA)

A Impact of Debt Financing at 10 Interest Rate 1 Net Income By introducing debt financing Houston Health insurance company will have interest expenses The interest expense is calculated by multiplying ... View the full answer