Thompson Electronics, Inc., is presently 100 percent equity financed and has assets of $100 million. Thompsons present

Question:

Thompson Electronics, Inc., is presently 100 percent equity financed and has assets of $100 million. Thompson’s present net income is $9 million, and the company’s marginal and average tax rates are 40 percent. In addition, Thompson has 4 million common shares outstanding, and its current annual is $0.75 a share. Currently, the company is able to borrow 10 percent perpetual debt, that is, debt that has no date. What amount of 10 percent perpetual debt would Thompson have to borrow in order to increase its return on stockholders’ equity to 15 percent, assuming that the debt proceeds are used to retire equity?

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