The Borrowing Company has total assets of \(\$ 100,000\) during the year. It has borrowed \(\$ 20,000\) at a 10 percent annual rate and pays income taxes at a rate of 40 percent of pretax income. Shareholders' equity is \(\$ 80,000\).
a What must net income be for the rate of return on shareholders' equity to equal the rate of return on assets (the all capital earnings rate)?
b What is the rate of return on shareholders' equity for the net income determined above in part a?
c What must income before interest and income taxes be to achieve this net income?
d Repeat parts

a, b, and c assuming borrowing of \(\$ 80,000\) and shareholders' equity of \(\$ 20,000\).
e Compare the results from the two different debt-equity relations. What generalizations can be made?