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Calculate the new debt-equity ratio

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Assume that an all-equity (unlevered ) firm has a return on assets (ROA) of 18.32 percent. Now assume that this form issues debt and uses the proceeds to buy back common stock, where the cost of this debt is 7.0 percent and the firm's tax rate is 40.0 percent. Finally, assume that this results in an ROE for the newly levered firm of 23.156992 percentGiven this data, determine what the new debt/equity ratio must be for the firm to have this level of ROE. [Hint: ROE is a function of the ROA of an equivalent unlevered firm. plus a leverage effect, and a tax shelter effect.]

Reference no: EM133074042

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