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  1. business
  2. accounting
  3. a firm faces a 30 percent tax rate and has $700m i

A firm faces a 30 percent tax rate and has $700m in assets, currently financed...

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Accounting

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A firm faces a 30 percent tax rate and has $700m in assets, currently financed entirely with equity. Equity is worth $100 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $100m. The firm is considering switching to a 45 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. How much will ROE change if they switch to the proposed capital structure? Multiple Choice There will be no change in the firm's ROE. The ROE will increase by 3.50 percent. The ROE will increase by 2.45 percent

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