You work for the CEO of a new company that plans to manufacture and sell a...

 

 

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You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $180,000. The company is small, so it is not subject to the interest deduction limitation. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.c., what is ROEL-ROEU? Do not round your intermediate calculations. 0% Debt, U 60% Debt, L Oper. income (EBIT) $180,000 $180,000 Required investment $2,500,000 $2,500,000 % Debt 0.0% 60.0% S of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 Interest rate Tax rate $1,000,000 NA 10.00% 25% 25% You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $180,000. The company is small, so it is not subject to the interest deduction limitation. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.c., what is ROEL-ROEU? Do not round your intermediate calculations. 0% Debt, U 60% Debt, L Oper. income (EBIT) $180,000 $180,000 Required investment $2,500,000 $2,500,000 % Debt 0.0% 60.0% S of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 Interest rate Tax rate $1,000,000 NA 10.00% 25% 25%

Answer rating: 100% (QA)

Impact of Debt Financing on ROE ROEL ROE We can analyze the impact of debt financing on ROE by calcu... View the full answer