Roe change in response to the change in capital structure

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Reference no: EM131535313

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $395,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?

Please show all the steps and formulas while calculating.

Reference no: EM131535313

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