Tyler Health Plans currently uses zero debt financing. Its operating income (EBIT) is $2 million, and its pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all equity finances, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent.What impact would the new capital structure have on the firm s net income, total dollars returned to investors, and return on equity?
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