Response to the following problem:
Quigley Inc. is a considering two financial plans for the coming year. Management expects sales to be 300000, operating costs to be 265000 assets to be 200000 and its tax rate is 35%. Under plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with exisiting bond holders the TIE ratio would have to be maintained at or above 4.0. Under plan B, the maximum debt that met the TIE constrait would be employed.
Assuming that sales operating costs assets the interest rate and the tax rate would all remain constant, by how much would the ROE change in response to the change in capital structure.
3.71
4.08
4.48
4.93
5.18