As the financial controller for KL Incorporated, a highly diversified conglomerate, you are considering the alternative financing plans for the next millennium. Due to the good relationship with the banks, your firm is able to obtain loan at a favorable rate of 8%.
The plans are as follows:
70 % equity financing and 30% debt financing
50% equity financing and 50% debt financing
Determine the rate of return on shareholders' capital for each of the financing alternatives if the rate of return on assets turned out to be as follows:
a) 20%
b) -24%