Problem:
Return on Equity
A firm needs $800 to start and has the following expectations:
Sales $1,600
Expenses $1,450
Tax Rate 33% of earnings
1) What are the earnings if the owners invest (use their own money) for the $900 needed to start?
2) If the firm borrows $400 of the $800 at an interest rate of 10%, what are the firm's net earnings?
3) What is the return on the owner's investment in each case? Why do the returns differ?
4) If the expenses rise to $1,500, what will be the returns in each case?
5) In which case did the returns decline more?
6) What generalization can you draw from the above?