1. The video discussed collateralization of assets to secure a loan, assumption of massive debt loads, and levering tax incentives against risk as to boost annual profits. However, which of the following is the riskiest part of performing the LBO?

A. Collateralization of Assets

B. Assumption of Interest Payments

C. Decreasing Tax Shield as Debt is Paid Off

D. None of the Above

2. Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?

4.36%

4.57%

4.80%

5.04%