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Business, 03.08.2019 03:00 cschellfamily

Commonwealth construction (cc) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. cc will own no securities, so all of its income will be operating income. if it so chooses, cc can finance up to 30% of its assets with debt, which will have an 11% interest rate. if it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. assuming a 35% tax rate on all taxable income, what is the difference between cc's expected roe if it finances these assets with 30% debt versus its expected roe if it finances these assets entirely with common stock?

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