Answer:
1.74%
Explanation:
17% Debt 50% Debt
Sales $500,000 $500,000
Less: Cost $450,000 $450,000
Less: Interest <u>$5,546</u> <u>$17,400</u>
Profit before tax $44,454 $32,600
Less: Tax at 35% <u> $15,559</u> <u>$11,410</u>
Net Income <u> $28,895</u> <u>$21,190</u>
Equity $361,050 $217,500
Return on Equity 8.00% 9.74%
Change in ROE = 9.74% - 8.00% = 1.74%
Workings
Interest (17% Debt) = 43,500*17%*7.5% = $5,546
Interest (50% Debt) = 43,500*50%*8% = $17,400
Tax (17% Debt) = $44,454 * 0.35 = 15,559
Tax (50% Debt) = $32,600 * 0.35 = 11,410
Equity (17% Debt) =435,000*83% = 361,050
Equity (50% Debt) = 435,000*50% = $217,500
Return on Equity = $28,895/$361,050 = 8.00%
Return on Equity = $21,190/$217,500 = 9.74%
