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.
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