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:

Self-Interests

The focus on one's own benefit or advantage, especially when pursued without regard for others.

Utilitarian View

An ethical philosophy that posits the best action is the one that maximizes utility, generally defined as actions that promote happiness or pleasure and reduce suffering.

Ethical Behaviour

Conduct based on recognized moral principles or values, emphasizing honesty, fairness, and integrity in personal and professional realms.

Greatest Good

A principle aiming at the maximum positive outcome or benefit for the largest number of people.