Problem:
Company A has $1.2 million in assets that are currently financed with all equity. The firm's EBIT is $300,000. The corporate tax rate is 30%. Assume that the interest rate on debt is 5%.
Required:
Question 1: If the firm changes its capital structure to include 40% debt, what is the firm's ROE before and after the change?
Note: Please show how to work it out.