Last year John Washington Corp. had $295,000 of assets (which is equal to its total invested capital), $18,750 of net income, and a debt- to-total-capital ratio of 37%. Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%, Sales,
total assets, and total invested capital will not be affected, but interest expenses would increase. However, the CFO believes that better
cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the
change in the capital structure improve the ROE?