What conclusion could you draw from here

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Reference no: EM13137769

Scenario A Debt $0
Equity $10,000

Income before taxes and interest expenses $2,000
Interest expenses $0 (because there is no debt)
Income before taxes $2,000
Income taxes at 40% $800
Net income $1,200

ROE (return on equity) = Net Income / Equity
=$1,200/$10,000 = 12%

Now, in Scenario B, we are going to borrow $4,000 debt and reduce the Equity to $6,000. Assume a 9% interest rate. Could you try to figure out the ROE. What conclusion could you draw from here?

Reference no: EM13137769

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