Gatwick Ltd. has after-tax profits (net income) of $500,000 and no debt. The owners have a $6
Question:
Gatwick Ltd. has after-tax profits (net income) of $500,000 and no debt. The owners have a $6 million equity investment in the business. If they borrow $2 million at 10% and use it to retire stock, how will the return on their investment (equity) change if earnings before interest and taxes remain the same? Assume a flat 40% tax rate and that the loan reduces equity dollar for dollar. (A business owner’s return on investment or equity is ROI _ ROE _ Net income/Equity.)
Step by Step Answer:
Gatwicks original return on invested equity is its aftertax ea...View the full answer
Related Video
The Dupont analysis is an expanded return on equity formula, calculated by multiplying the net profit margin by the asset turnover by the equity multiplier. The DuPont analysis is also known as the DuPont identity or DuPont model.This Video will guide on how to calculate return on Equity and estimate profitability of shareholders using DuPont Analysis.
Students also viewed these Corporate Finance questions
-
In 2020, Zip had earnings before interest and taxes of $6,200 million and had an effective tax rate of 35%. The price per share is $12 while the estimated market value of debt is $12,200 million. We...
-
A firm with earnings before interest and taxes of $500,000 needs $1 million of additional funds. If it issues debt, the bonds will mature after 20 years and have a coupon of 10 percent. The firm...
-
At Green Construction, earnings before interest and taxes (EBIT) for the year just ended were $70 million and are not expected to grow. The company pays $ 10 million in interest each year on its...
-
Find the values of the parameter p > 0 for which the following series converge. k=1 k ^ ( + In k + 1/ P
-
What percentage of the excess return variance for UTX is due to the market?
-
Briefly describe how a tsunami develops.
-
Explain form drag.
-
A reverse-osmosis plant is used to treat 30,000,000 gal/day of seawater at 20C containing 3.5 wt% dissolved solids to produce 10,000,000 gal/day of potable water with 500 ppm of dissolved solids, and...
-
Captain Jack Sparrow has been marooned on an island in the Atlantic by his crew, and decides to build a raft to escape. The wind seems quite steady, and first blows him due east for 11 km, and then...
-
On February 12, 2002, Nancy Trout and Delores Lake formed Kingfisher Corporation to sell fishing tackle. Pertinent information regarding Kingfisher is summarized as follows: Kingfisher's business...
-
In January 20X3, Elliott Industries recorded the following transactions: (1) Paid bills from 20X2 totaling $120,000 and collected $150,000 for sales that were made in 20X2. (2) Purchased inventory on...
-
Ed Fletcher is planning to start a business in corporate form that requires an investment of $500,000. He has that much money, but he can also borrow virtually the whole amount from a rich relative....
-
PepsiCos financial statements are presented in Appendix A. Financial statements for The Coca-Cola Company are presented in Appendix B. Instructions (a) Based on the information contained in these...
-
12:57 2. Knowledge Management Exam 202... DOCX-75 KB In 2002, after almost 50 years of performing, the Calgary Philharmonic Orchestra (CPO), Canada's fifth-largest, was seeking bankruptcy protection...
-
Describe in detail the process of preparing for a risk audit. What standard or regulatory framework do you think should be used as the basis of review? What documents should be created/made available...
-
Given the following process control data for a quality attribute (three samples of size 400 each): Sample Defectives #1 36 #2 32 #3 52 If the process proportion of defectives is unknown, what are the...
-
Links to an external site. Should the salary of employees who work remotely be renegotiated? What strategies should companies that decide to use home working take into account? How is this type of...
-
There are two producers of ice cream in Princeton, Ben and Jerry. The demand function for ice cream in this market is P = 10 + Q. How marginal cost is constant ?
-
Writing: Creating Effective Sentences: Media Skills: Social Networking, Chapter 8 If you are interested in business, chances are youve had an idea or two for starting a company. If you havent yet, go...
-
7. FALSE DILEMMA 8. GANDWAGON Definition: Fallacy example: How to revise argument: Definition: Fallacy example: How to revise argument:
-
A rotating flywheel is allowed to slow to a stop from a speed of \(500 \mathrm{rpm}\). While slowing, each minute it rotates two-thirds as many times as in the preceding minute. How many revolutions...
-
How do repurchases help firms manage the signaling effect of dividends.
-
Describe the ways in which international business has changed over the last 60 years. Include the concepts of an MNC and the different types of foreign investment.
-
Explain the concepts of sovereign debt and a sovereign debt crisis. Why is such a crisis different for a Eurozone country than for a country with a unique currency.
-
On-campus corporate presentations: Sympathy for the Devil Many students complain about the high number of corporate presentations taking place both on- and off-campus. In this question, we seek to...
-
How do organizations cultivate a culture of open innovation, leveraging crowdsourcing platforms, collaborative networks, and cross-industry partnerships to harness external knowledge and drive...
-
Braeden Sim is the accountant for Sim's Internet Service. From the following information, his task is to construct a balance sheet as of April 30, 201X, in proper form. Could you help him? (Click the...
Study smarter with the SolutionInn App