You work for the CEO of a new company that plans to manufacture and sell a new product,a watch that has an embedded TV set and a magnifying glass crystal.The issue now is how to finance the company,with only equity or with a mix of debt and equity.Expected operating income is $400,000.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 ROE_L − ROE_U?

Question

Quizplus · Accepted Answer

The Answer of You work for the CEO of a new company that plans to manufacture and sell a new product,a watch that has an embedded TV set and a magnifying glass crystal.The issue now is how to finance the company,with only equity or with a mix of debt and equity.Expected operating income is $400,000.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 ROE_L − ROE_U? A)5.85% B)6.14% C)6.45% D)6.77% E)7.11%

You Work for the CEO of a New Company That