You Have Been Hired by a New Firm That Is

Multiple Choice

You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wd) to only 10%. Other things held constant, and based on the data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROENew ? ROEOld? $$\begin{array} { l r l l } {\quad\quad\quad\quad\underline{\text { Operating Data}} } && {\quad\quad\quad \underline{\text { Other Data } }} \\\text { Capital } & \$ 4,000 & \text { Higher } \mathrm {w} _ { \mathrm { d } } & 60 \% \\\text { ROIC } = \text { EBIT } ( 1 - \mathrm { T } ) / \text { Capital } & 13.00 \% & \text { Higher interest rate } & 13 \% \\\text { Tax rate }& 35 \% & \text { Lower } \mathrm { w } _ { \mathrm { d } } & 10 \% \\ & & \text { Lower interest rate } & 9 \%\end{array}$$

A) 5.44%
B) 5.73%
C) 6.03%
D) 6.33%
E) 6.65%