Equity dollar for dollar, If they borrow $2 million at 10%

Equity dollar for dollar

Reference no: EM131007495

Gatwick Ltd. has after-tax profits (net income) of $500,000 and no debt. The owners have a $6 million equity investment in the business. If they borrow $2 million at 10% and use it to retire stock, how will the return on their investment (equity) change if earnings before interest and taxes remains the same? Assume a flat 40% tax rate and that the loan reduces equity dollar for dollar. (A business owner's return on investment or equity is ROI = ROE = Net income/Equity.)

Reference no: EM131007495

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