Aurillo Equipment Company (AEC)projected That Its ROE for Next Year

Multiple Choice

Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6%.However,the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding.The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80%,but the interest rate on the refinanced debt will be 10%.The rate on the old debt is 14%.Refinancing will not affect sales which are projected to be $300,000.EBIT will be 11% of sales,and the firm's tax rate is 40%.If AEC refinances its high interest bonds,what will be its projected new ROE?

A) 3.0%
B) 8.2%
C) 10.0%
D) 15.6%
E) 18.7%