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Central City Construction (CCC)_ROE_Debt Versus Equity

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Question;Central City Construction;(CCC) needs $1 million of assets to get started, and it expects to have a basis;earning power ratio of 20%. CCC will own no securities, so all of it income;will be operating income. If it so chooses, CCC can finance up to 50% of its;assets with debt, which will have an 8% interest rate. Assuming a 40% tax rate;on all taxable income, what is the difference between CCC's expected ROE if it;finances with 50% debt versus its expected ROE if it finances entirely with;common stock?

 

Paper#37386 | Written in 18-Jul-2015

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