Collect Yourself Urology Physicians (CYUP) provides the following data (EBIT is Earnings Before Interest and Taxes):
EBIT $60,000
Tax rate 25%
Assets $600,000
A. It’s assets are currently 100% equity financed (no debt). What is CYUP’s current ROE?
B. If they replace some Equity with 40% debt financing, at an interest rate of 8%, what is CYUP’s ROE?
C. What advice would you give CYUP regarding the addition of debt with a higher interest cost than their current ROE to their capital structure?