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

. You work for the CEO of a new company that plans to manufacture and sell a new product. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $520,000. 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.e., what is ROEL - ROEU? Do not round your intermediate calculations.

0% Debt, U 60% Debt, L Oper. income (EBIT) $520,000 $520,000 Required investment $2,300,000 $2,300,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,380,000 $ of Common equity $2,500,000 $920,000 Interest rate NA 10.00% Tax rate 35% 35%

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Answer The ROE in case of 0 % Debt is 14.70 % whereas it will increase to 26.99 % in case of 60% debt Financing

Taxes are calculated at 35%.

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