Your firm's debt ratio is only 5.00%, but the new CFO thinks that more debt should be employed. She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (w_c) = 1 – w_d. Other things held constant, and based on the data below, if the firm increases the percentage of debt in its capital structure (w_d) to 60.0%, by how much would the ROE change, i.e., what is ROE_New - ROE_Old? Do not round your intermediate calculations.

Operating Data			Other Data
Capital	$150,000		Old wd	5%
ROIC = EBIT (1 – T)/Capital	10.00%		Old interest rate	10%
Tax rate	25%		New wd	60%
			New interest rate	12%

Answer rating: 100% (QA)

To calculate the change in Return on Equity ROE when the firm increases its debt ratio ... View the full answer