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    Investment Calculations and Return on Equity

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    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

    a. What are the earnings if the owners invest (use their own money) for the $900 needed to start?
    b. If the firm borrows $400 of the $800 at an interest rate of 10%, what are the firm's net earnings?
    c, What is the return on the owner's investment in each case? Why do the returns differ?
    d. If the expenses rise to $1,500, what will be the returns in each case?
    e. In which case did the returns decline more?
    f. What generalization can you draw from the above?

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    Solution Preview

    See the attachment.

    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

    a. What are the earnings if the owners invest (use their own money) for the $900 needed to start?
    b. If the firm borrows $400 of the $800 at an interest rate of 10%, what are the firm's net earnings?
    c, What is the return on the owner's investment in each case? Why do the returns ...

    Solution Summary

    This solution contains detailed instructions and calculations for the return on equity of a predetermined starting amount and stated expectations.

    $2.19