ABC has accumulated $23 million in assets, operating income of $1.75 million. The tax rate is 35%. It finances 25%, 50% and 75% of its assets with debt at costs of 9%,10& and 12% respectively.
a. Determine the ROE under three models.
b. Which capital structure is best and why?
c. What if EBIT increases by 12% which structure is best as well as ROE?
d. Compare and discuss your overall results.