# Investment Calculations and Return on Equity

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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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.