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Hugh Brokett’s Insurance provides the following data (EBIT is Earnings Before Interest and Taxes): (Show Work)
EBIT = $ 32,000
Tax rate = 25%
Assets = $ 240,000
A. It’s assets are currently 100% equity financed (no debt). What is Hugh Brokett’s current ROE?
B. If they replace 60% of the Equity with debt financing, at an interest rate of 12%, what is their ROE?
C. What advice would you give Hugh Brokett regarding the addition of debt to their capital structure?
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