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Paula opens a store specializing in pant suits called Executive Hemline. This corporation is trying...

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Finance

Paula opens a store specializing in pant suits called Executive Hemline. This corporation is trying to decide how much debt to use in its capital structure. It will need 5 million in assets and will have an EBIT of $340,000. It can finance up to (maximum) 70% of its assets with debt acquiring it at a 4% interest rate. As it is just being formed, it has no liabilities yet. The applicable tax rate is 40%. What is the difference between the expected ROEs if it's finances with maximum debt vs. going all equity?

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