Total dollar return to investors and return on equity

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Problem:

West Chester Health Plans currently uses a zero debt financing. Its operating profit is $55 million, and it pays taxes at 30 percent rate. It has $10 million in assets and because it is all-equity financed, $10 million is equity. Suppose the firm is considering replacing one-third of its equity financing with debt financing that bears an interest rate of 10 percent. 

Required:

Assume that the debt financing would cost 20 percent. What impact would the new capital structure have on the firms profit, total dollar return to investors, and return on equity?

Reference no: EM132419507

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