Seattle Health Plans currently uses zero debt financing. Its operating income (EBIT) is $1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and because it is all-equity financed $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent. Under the new capital structure, what would be...
a. the firm's net income? The total dollar returns to investors? The new ROE?
b. Repeat the analysis for Part a, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. The firm's net income? The total dollar returns to investors? the new ROE?