question : Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK?

EXHIBIT 9 | Pro Forma Tax Shield Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007) Debt/Total Capital Actual 10% 20% 30% 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% Interest rate1 Tax rate Earnings before income taxes and interest? Interest expense Earnings before taxes Income taxes 30,054 0 30,054 9,755 20,299 30,054 1,391 28,663 9,303 19,359 30,054 2,783 27,271 8,852 18,419 30,054 4,174 25,880 8,400 17,480 Net income 0 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Book value: Debt Equity Total capital Market value: Debt Equity Market value of capital 0 643,773 643,773 22,589 628,516 651,105 45,178 613,259 658,437 67,766 598,002 665,769 Notes: Interest rate of CPK's credit facility with Bank of America: LIBOR + 0.80%. 2Earnings before interest and taxes (EBIT) include interest income. 3Market values of debt equal book values. Actual market value of equity equals the share price ($22.10) multiplied by the current number of shares outstanding (29.13 million). Source: Case writer analysis based on CPK financial data