Question: Problem 4-16 Return on Equity Central City Construction (CCC) needs $3 million of assets to get started, and it expects to have a basic earning

Problem 4-16 Return on Equity Central City Construction (CCC) needs $3

Problem 4-16 Return on Equity Central City Construction (CCC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 25%. CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 45% of its assets with debt, which will have an 10% interest rate. Assuming a 35% tax rate on all taxable income, what is the difference between CCC?s expected ROE if it finances with 45% debt versus its expected ROE if it finances entirely with common stock? Round your answer to two decimal places

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