Hugh Brokett's Insurance provides the following data (EBIT is earnings Before Interest and Taxes)
- EBIT = $32,000
- Tax Rate = 250%
- Assets = $240,000
A. It's assets are currently 100% equit financed (no debt). What is Hugh Brokett's current ROE?
B. If they replace 60% of the equity with debt financing at an interest rate of 12%, what is their ROE?
C. What advice would you give Hugh Brokett regarding the addition of debt to their capital structure?