You are given the following information concerning a firm: Assets required for operations: $5,000,000 Revenues:...
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You are given the following information concerning a firm: Assets required for operations: $5,000,000 Revenues: $8,400,000 Operating Expenses: $7,900,000 Income Tax Rate: 40% Management faces 3 possible combinations of financing: 1. 100% equity financing 2. 30% debt financing with a 6% interest rate 3. 60% debt financing with a 6% interest rate a) What is the net income for each combination of debt and equity financing? b) What is the return on equity for each combination of debt and equity financing? c) If the interest rate had been 12% instead of 6%, what would be the return on equity for combination of debt and equity financing? d) What is the implication of the use of financial leverage when interest rates change?
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