A Firm Faces a 30 Percent Tax Rate and Has

question 23

Multiple Choice

A firm faces a 30 percent tax rate and has $200m in assets, currently financed entirely with equity. Equity is worth $10 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 $10m. The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the firm's new ROE if they switch to the proposed capital structure?

• A)2.33 percent
• B)2.86 percent
• C)2.39 percent
• D)1.04 percent

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