Question

Jacob Cornwall has a business in which he’s invested $250,000 of his own money, which is the firm’s only capital. (There are no other equity investors and no debt.) In a recent year the firm had net income of $20,000 for a return on equity of 8% ($20,000/$250,000). What will the firm’s return on equity be next year if net income from business operations remains the same but it borrows $150,000 returning the same amount to Jake from the equity account if
a. The after tax interest rate is 6%.
b. The after tax interest rate is 10%.
c. Comment on the difference between the results of a and b.


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  • CreatedMay 14, 2015
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