39 . 4. You work for the CEO of a new...
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. 4. 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 $216,000. The O company is small, so it is not subject to the interest deduction limitation. 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.o., what is ROEL - ROEU? Do not round your intermediate calculations. 0% Debt, u 60% Debt. Oper income (EBIT) $216,000 $216,000 Required investment $2,500,000 $2,500,000 * Debt 0.096 60.0% S of Debt 50.00 $1,500,000 S of Common equity $2,500,000 $1,000,000 Interest rate NA 10.00% Tax rate 25% 25% 450 p. . Ob-1422pp 318p Od:53 p 5. LG 47. 4 . 10 50 51
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