Assume that a firm starts out as an all-equity firm with $1,000,000 of equity, $1,000,000 of assets, and a return on assets (ROA) of 10 percent. Also, assume that management then makes the decision to issue $200,000 of debt at a before-tax rate of 5 percent and use the proceeds to buy back $200,000 of equity. Based on this information, and assuming that the firm's tax rate is 40 percent, determine what the return on equity (ROE) will be after the buyback.
Options:
13.00%
15.50%
14.25%
11.75%
10.50%