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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?

#### 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