Trunks Company estimates that pretax earnings for the year ended December 31, 2011, will be $230,000 if
Question:
Trunks Company estimates that pretax earnings for the year ended December 31, 2011, will be $230,000 if it operates without borrowed capital. Income tax is 40% of earnings. Average stockholders’ equity for 2011 is $740,000. Assuming that the company is able to borrow $800,000 at 12% interest, indicate the effects on net income and return on equity if borrowed capital earns
(1) 15% and
(2) 8%. Explain the cause of the variations.
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Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
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