Reference no: EM13900872

Kyle Smitley is the founder of barley & birch. Assume that her company currently has $250,000 in equity, and she is considering a $100,000 expansion to meet increased demand. The $100,000 expansion would yield $16,000 in additional annual income before interest expense. Assume that the business currently earns $ 40,000 annual income before interest expense of $10,000, yielding a return on equity of 12% ($30,000 / $250,000). To fund the expansion, she is considering the issuance of a 10 year, $100,000 note with annual interest payments (the principal due at the end of 10 years). 

Required:

1. Using return on equity as the decision criterion, show computations to support or reject the expansion if interest on the $ 100,000 note is 

(a) 10%, 

(b) 15%, 

(c) 16%, 

(d) 17%, 

(e) 20%. 

2. What general rule do the results in part 1 illustrate?