Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000. The debt-to-total-assets ratio was 17%,…

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000.  The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm’s tax rate was 35%.  The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio.  Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%.  By how much would the ROE change in response to the change in the capital structure?

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