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Quigley Inc. is considering two financial plans for the comingyear. Management expects sales to be $301,770, operating costs tobe $266,545, assets to be $200,000, and its tax rate to be 35%.Under Plan A it would use 25% debt and 75% common equity. Theinterest rate on the debt would be 8.8%, but the TIE ratio wouldhave to be kept at 4.00 or more. Under Plan B the maximum debt thatmet the TIE constraint would be employed. Assuming that sales,operating costs, assets, the interest rate, and the tax rate wouldall remain constant, by how much would the ROE change in responseto the change in the capital structure?
a. 3.83%
b. 4.02%
c. 4.22%
d. 4.43%
e. 4.65%
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Nelly Stracke
Nelly StrackeLv2
30 Sep 2019

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