You have been hired by a new f

You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wd) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on the data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROEHigher – ROELower? Do not round your intermediate calculations.

Operating Data Other Data
Capital $4,000 Higher wd 60%
ROIC = EBIT(1 – T)/Capital 12.00% Higher interest rate 13%
Tax rate 25% Lower wd 10%
Lower interest rate 9%
a. 1.87%
b. 2.22%
c. 3.75%
d. 2.80%

e. 2.54%

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