You Have Been Hired by a New Firm That Is

question 26

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%.Both companies are small,so they are not subject to the interest deduction limitation.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. ​

• A) 3.72%
• B) 4.18%
• C) 4.77%
• D) 3.93%
• E) 4.68%

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Definitions:

Alternative Postulates

Hypotheses or statements made as alternatives to the main hypothesis, often used in contrasting experimental conditions.

Educated Guess

An assumption or prediction based on knowledge, experience, and reasoning, often used in the context of forming a hypothesis.

Relationship Between Variables

The way in which two or more variables are associated with one another, which can be positive, negative, or neutral.

Hypothesis

A proposed explanation for a phenomenon, forming the basis for experimentation to validate or invalidate through observation and experimentation.