**Answer:**

**%Change in ROE = 1.85%**

**Hence, The ROE change in response to the change in the capital structure will be 1.85%**

**Explanation:**

**Data Given: **

Sales = 300,000

Operating Cost = 265,000

EBIT = Earnings Before Interests and Taxes = Sales - Operating Costs

EBIT = 300,000 - 265,000

EBIT = 35000

So,

For PLAN A, we have TIE = 5

We know that,

TIE = EBIT/Interest

Interest = EBIT/TIE

Interest = 35000/5

Interest = 7000

Now, we need to find out the maximum amount of Debt:

Maximum amount of debt = Interest/Rate of Interest

We know that,

Rate of Interest = 8.8%

Interest = 7000

So,

Maximum amount of debt = 7000/0.088

Maximum amount of debt = 79,545.45

**For PLAN A: **

Assets = 200,000

Debt (25%) = 50,000

Equity (75%) = 150,000

Interest Rate = 8.8%

**For PLAN B: **

Assets = 200,000

Debt (25%) = 79,545.45

Equity (75%) = 120,454.54 (200,000 - 79545.45)

Interest Rate = 8.8%

**Income Statement: **

**For Plan A: **

Sales = 300,000

Operating Cost = 265,000

EBIT = 35000

Interest = 4400 (50,000 x 8.8%)

EBT = 30,600 (35000 - 4400)

Tax (35%) = 10710 (35% x 30,600)

Net Income After Tax = 19890

**Similarly, For Plan B: **

Sales = 300,000

Operating Cost = 265,000

EBIT = 35000

Interest = 7000 (79,545.45 x 8.8%)

EBT = 28,000 (35000 - 4400)

Tax (35%) = 9800 (35% x 28000)

**Net Income After Tax = 18200**

**ROE = Net income / Equity **

ROE For Plan A = 19890/ 150,000 x 100

**ROE for Plan A = 13.26 %**

**Similarly, **

**ROE for Plan B = Net income / Equity **

ROE for Plan B = 18200/ 120,454.54

ROE for Plan B = 15.109%

%Change in ROE = 15.11% - 13.26%

**%Change in ROE = 1.85%**

**Hence, The ROE change in response to the change in the capital structure will be 1.85%**