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.