Answer:
increase in ROE due to plan B = 26.44% - 20.55% = 5.89%
Explanation:
currently EBIT = $301,770 - $266,545 = $35,225
TIE ratio = EBIT / interest expense
Plan A:
interest expense = ($200,000 x 25%) x 8,8% = $4,400
TIE ratio = $35,225 / $4,400 = 8
net income (assuming no taxes) = $30,825
ROE = $30,825 / $150,000 = 20.55%
Plan B:
TIE ratio = 4 = $35,225 / interest expense
interest expense = $35,225 / 4 = $8,806.25
total debt = $8,806.25 / 8.8% = $100,071
equity = $99,929
net income = $35,225 - $8,806.25 = $26,418.75
ROE = $26,418.75 / $99,929 = 26.44%
increase in ROE due to plan B = 26.44% - 20.55% = 5.89%
