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 20%.
CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 60% of its assets with debt, which will have an 7% interest rate.
Assuming a 30% tax rate on all taxable income, what is the difference between CCC's expected ROE if it finances with 60% debt versus its expected ROE if it finances entirely with common stock? _____ %