Oaks Corporation estimates that pretax earnings for the year ended December 31, 2008, will be $310,000 if it operates without borrowed capital. Income tax is 40% of earnings. Average stockholders’ equity for 2008 is $860,000. Assuming that the company is able to borrow $900,000 at 11% interest, indicate the effects on net income and return on equity if borrowed capital earns (1) 16% and (2) 9%. Explain the cause of the variations.