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How capital structure improve the roe

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Last year Chantler Corp. had $300,000 of assets, $20,000 of net income, and a liability-to- asset ratio of 20%. Now suppose the new CFO convinces the president to increase the liability-to-asset ratio to 40%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?

Reference no: EM132657532

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