Last Year Camden Corp

Multiple Choice

Last year Camden Corp. had sales of $500,000, operating costs of $450,000, and year-end assets (which is equal to its total invested capital) of $395,000. The debt-to-total-capital ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-capital ratio. Assume that sales, operating costs, total assets, total invested capital, and the tax rate would not be effected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?

A) 1.71%
B) 1.90%
C) 2.11%
D) 2.34%