Seattle Health Plans currently uses zero debt financing. Its operating profit is $1 million, and it pays taxes at 40 percent rate. It has $5 million in equity. Suppose the firm is considering replacing half of its equity financing that bears an interest rate of 8 percent.
What impact would the new capital structure have on the firm’s profit, total dollar return to investors, and return on equity?
Redo the analysis, but now assume that the debt financing would cost 15 percent.
Repeat the analysis required for Part a, but now assume that Seattle Health Plans is not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a.