Financial Risk Manager Part 2
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Suppose a firm with a simple capital structure has assets of $20.0 million and debt of $10.0 million. Return on assets (ROA) is 9.0% and cost of debt is 4.0%, such that the firm's leverage is 2.0 and its return on equity (ROE) is 14.0%. If the firm borrows an additional $6.0 million at the same cost of 4.0%, and asset returns are fixed, what is the firm's new leverage and return on equity (ROE)?
A
Leverage = 1.7 and ROE = 13.3%.
B
Leverage = 2.0 and ROE = 15.7%.
C
Leverage = 2.3 and ROE = 23.5%.
D
Leverage = 2.6 and ROE = 17.0%.