Finances entirely with equity capital

Assignment Help Financial Management

Reference no: EM13974499

Southwest Physicians, a medical group practice, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a profit margin of 5%. The group is considering two financing alternatives. First, it can use all-equity financing by requiring each physician to contribute his or her pro rata share. Alternantively, the practice can finance up to 50% of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected profit margin, what is the difference between the expected ROE if the group finances with 50% debt versus the expected ROE if it finances entirely with equity capital?

Reference no: EM13974499

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