You Have Been Hired by a New Firm That Is

question 78

Multiple Choice

You have been hired by a new firm that is just being started.The CFO wants to finance with 60% debt,but the president thinks it would be better to hold the percentage of debt in the capital structure (w_d) to only 10%.Other things held constant,and based on the data below,if the firm uses more debt,by how much would the ROE change,i.e. ,what is ROE_Higher - ROE_Lower? Do not round your intermediate calculations. $\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\\\text { Capital } & \$ 4,000 & \text { Higher wd } & 60 \% \\\text { ROIC = EBIT }(1-\mathrm{T}) / \text { Capital } & 17.00 \% & \text { Higher interest rate } & 13 \% \\\text { Tax rate } & 35 \% & \text { Lower wd } & 10 \% \\& & \text { Lower interest rate } & 9 \%\end{array}$
?

• A) 10.31%
• B) 11.59%
• C) 10.43%
• D) 9.15%
• E) 10.54%