Question: You are interested in buying a warehouse for your firm. The warehouse costs $350,000 and using it will save the firm $50,000 annually forever. The firm can borrow any amount of money at an 8% annual interest rate; all money borrowed is "perpetual debt"-meaning that the firm pays only the annual interest payment and never returns the debt principal. The firm's tax rate is 40%. What will be the firm's additional annual income and its return on equity (ROE) on the investment in the following four cases?
a. The firm finances the purchase with equity only.
b. The firm finances the purchase with 75% equity and 25% debt.
c. The firm finances the purchase with 50% equity and 50% debt.
d. The firm finances the purchase with 20% equity and 80% debt.