Jacob Cornwall has a business in which he’s invested $250,000 of his own money. Jacob Cornwall has a business in which he’s invested $250,000 of his own money, which is the firm’s only capital. (There are no other equity investors and no debt.) In a recent year the firm had net income of $20,000 for a return on equity of 8% ($20,000/$250,000). What will the firm’s return on equity be next year if net income from business operations remains the same but it borrows $150,000 returning the same amount to Jake from the equity account if The after tax interest rate is 6%. The after tax interest rate is 10%. Comment on the difference between the results of a and b.

Jacob Cornwall has a business in which he’s invested $250,000 of his own money. Jacob Cornwall has a business in which he’s invested $250,000 of his own money, which is the firm’s only capital. (There are no other equity investors and no debt.) In a recent year the firm had net income of $20,000 for a return on equity of 8% ($20,000/$250,000). What will the firm’s return on equity be next year if net income from business operations remains the same but it borrows $150,000 returning the same amount to Jake from the equity account if The after tax interest rate is 6%. The after tax interest rate is 10%. Comment on the difference between the results of a and b.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 17QTD

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