What impact would the new capital structure have on the firm’s net income, total dollar return to investors, and ROE?
What impact would the new capital structure have on the firm’s net income, total dollar return to investors, and ROE?
What impact would the new capital structure have on the firm’s net income, total dollar return to investors, and ROE?
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Seattle Health Plans currently uses zero-debt financing. Its operating income (EBIT) is $1 million, and it pays taxes at a 40% rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 %.
a. What impact would the new capital structure have on the firm’s net income, total dollar return to investors, and ROE?
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