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. $\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\\\text { Capital } & \$ 150,000 & \text { Old wd } & 5 \% \\\text { ROIC = EBIT }(1-\text { T) /Capital } & 20.00 \% & \text { Old interest rate } & 10 \% \\\text { Tax rate } & 35 \% & \text { New wd } & 60 \% \\& & \text { New interest rate } & 12 \%\end{array}$
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Question

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.

\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\\\text { Capital } & \$ 150,000 & \text { Old wd } & 5 \% \\\text { ROIC = EBIT }(1-\text { T) /Capital } & 20.00 \% & \text { Old interest rate } & 10 \% \\\text { Tax rate } & 35 \% & \text { New wd } & 60 \% \\& & \text { New interest rate } & 12 \%\end{array}

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Quizplus · Accepted Answer

The Answer of 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. $\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\ \text { Capital } & \$ 150,000 & \text { Old wd } & 5 \% \ \text { ROIC = EBIT }(1-\text { T)/Capital } & 20.00 \% & \text { Old interest rate } & 10 \% \ \text { Tax rate } & 35 \% & \text { New wd } & 60 \% \ & & \text { New interest rate } & 12 \% \end{array}$ ? A) 14.95% B) 19.17% C) 17.59% D) 21.64% E) 14.42%

Your Firm's Debt Ratio Is Only 5 ? A) 14

Your Firm's Debt Ratio Is Only 5 ?
A) 14