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Seattle Health Plans currently uses zero-debt financing. Its operating income (EBIT) is $1 million, and it pays taxes at a 40% rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 %.

What impact would the new capital structure have on the firm's net income, total dollar return to investors, and ROE?

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Basic Finance, Finance

Category:- Basic Finance
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