Central City Construction (CCC) needs $2 million of assets to get started, and i

Question

Central City Construction (CCC) needs $2 million of assets to get started, and it expects to have a basic earning power ratio of 30%. CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 55% of its assets with debt, which will have an 11% interest rate. Assuming a 35% tax rate on all taxable income, what is the difference between CCC's expected ROE if it financeswith 55% debt versus its expected ROE if it finances entirely with common stock? Round your answer to two decimal places.

Explanation / Answer

BEP Ratio = Earnings Before interest and tax

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