Sole owner of an all-equity firm

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Suppose that you are the sole owner of an all-equity firm, the assets of which are worth $500,000. The ROA is 15% per year paid as a dividend to you. If you have the firm issue $100,000 of debt at 6%, the interest expense will be paid by the firm out of the earnings that had constituted ROA. The debt is secured by the firm, not by you. The firm pays a special dividend to you of $100,000 on the day the debt is issued. The tax rate is 34%. What will your return on equity be in the year after you go into debt?

Reference no: EM13895721

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