Purchase Solution

Borrrowings and Return on Common Equity

Not what you're looking for?

Ask Custom Question

Explain why borrowing might lever up the return on common equity?

Purchase this Solution

Solution Summary

The solution describes how can borrowings can increase in return on common equity. It is explained with suitable examples.

Solution Preview

Please refer attached document for complete details.

Answer:

Interest paid on borrowings is a tax-deductible expanse. It provides a shield to taxable income from federal and state taxes. It decreases the cash flow towards taxes. Thus more money goes to debt as well as equity holders.

Let us consider table given below. Firm A's assets are 100% equity based. Debt to Asset ratio of firm B is 0.5 i.e. $25000 from equity and $25000 from debt (@11% p.a.) Suppose both firms have same risks and EBIT of $7500.

Firm A Firm ...

Solution provided by:
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution


Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.