Return on Equity
Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 30%. CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 35% of its assets with debt, which will have an 8% interest rate. Assuming a 40% tax rate on all taxable income, what is the difference between CCC's expected ROE if it financeswith 35% debt versus its expected ROE if it finances entirely with common stock? Round your answer to two decimal places. Do not round intermediate calculations.