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Calculate the firm new roe after the debt

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An all equity firm has a return on assets (ROA) of 14.20 percent. The firm makes the decision to replace 30% of its equity with debt that has a before-tax cost of 8 percent (the firm's tax rate is 40 percent). Calculate the firm's new ROE after the debt has been issued and equity has been repurchased (hint: leverage effect and tax shield effect).

Reference no: EM133071344

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