Commonwealth Construction (CC) needs $3 million of assets to getstarted, and it expects to have a basic earning power ratio of 20%.CC will own no securities, so all of its income will be operatingincome. If it so chooses, CC can finance up to 60% of its assetswith debt, which will have an 11% interest rate. If it chooses touse debt, the firm will finance using only debt and common equity,so no preferred stock will be used. Assuming a 35% tax rate on alltaxable income, what is the difference between CC’s expected ROE ifit finances these assets with 60% debt versus
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