Question: Harbor View Medical currently uses zero debt financing. Its operating income (EBIT) is $2 million, and it pays taxes at a 25 percent rate. It

Harbor View Medical currently uses zero debt financing. Its operating income (EBIT) is $2 million, and it pays taxes at a 25 percent rate. It has $15 million in assets and is all equity financed. The firm, however, will replace two thirds of its equity financing with debt financing by issuing bonds bearing an interest rate of 8 percent. By how much will the return on equity (ROE) change after the change in the capital structure?

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