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 (wd) 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 ROENew - ROEOld?
A) 5.44%
B) 5.73%
C) 6.03%
D) 6.33%
E) 6.65%

Question

Quizplus · Accepted Answer

Using more debt increases financial leverage, which amplifies the return on equity (ROE). The change in ROE can be calculated using the formula for ROE, considering the impact of increased debt on interest expenses and net income.

You Have Been Hired by a New Firm That Is