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Determine what is the difference between CCs expected ROE

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Point 1: Commonwealth Construction (CC) needs 52 million of assets to get started, and it expects to have a basic earning power ratio of 15%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 35% of its assets with debt, which will have a 9% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used.

Question 1: Assuming a 250/o tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 35% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places.

Reference no: EM132476281

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