Question

RETURN ON EQUITY Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 35%. CC will own no securities, so all of its income will be operating income. If it so chooses, CC can finance up to 50% of its assets with debt, ich wil have an 10 % nteres rate. r t to ses to use de he m will finance using only debt and common equity, so no preferred stock will be used. Assuming a 30% tax rate on all taxable income, what is the difference between CC's expected ROE if it finances these assets with 50% debt versus its expected ROE fitfinances these assets entire with common stock? Round rans er two decimal places

Answer 1