Riley-Rocky Roof! Ing, Inc. is a new company that replaces shingled roofs with metal roofs in the Kansas City area. The product is superior, and as a result, sales are going crazy. The company is only two years old and it’s return on assets will easily exceed 20% for at least the next four years. The cost of borrowing funds–which are needed to purchase the equipment needed to meet the growing demand–is 10% before taxes. The company’s tax rate is 35 percent. The company’s current capital structure is 90% equity, 10% debt, and the total assets are $4 million.
With this information, should the company borrow more money? If so, how much should it borrow, in your opinion? Support your view. There are no right or wrong answers here–there is only the logic you present to support your view.