A Firm Faces a 21 Percent Tax Rate and Has

question 1

Multiple Choice

A firm faces a 21 percent tax rate and has $6m in assets, currently financed entirely with equity. Equity is worth $200 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 $50m. The firm is considering switching to a 50 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt. How much will ROE change if they switch to the proposed capital structure?

• A) There will be no change in the firm's ROE.
• B) The ROE will increase by 0.61 percent.
• C) The ROE will increase by 3.00 percent.
• D) The ROE will increase by 6.52 percent.

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Definitions:

Positive Self-Talk

A practice of making affirming statements to oneself to boost confidence and emotional well-being.

Self-Image

An individual's perception of themselves, including their appearance, abilities, and character.

Ideal Self

A person's conception of how they would like to be, often serving as a motivation for change in pursuit of self-improvement.

Ego

In psychology, a part of the mind that mediates between the conscious and the unconscious and is responsible for reality testing and a sense of personal identity.