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Total dollar return to investors-return on equity

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Problem: NYU Health Plans currently uses a zero debt financing. Its operating profit is $55 million, and it pays taxes at 30 percent rate. It has $10 million in assets and because it is all-equity financed, $10 million is equity. Suppose the firm is considering replacing one-third of its equity financing with debt financing that bears an interest rate of 10 percent.

Required:

Question: What impact would the new capital structure have on the firm's profit, total dollar return to investors, and return on equity? Please provide the authentic solutions along with all the calculation.

Reference no: EM132419635

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