1) a) Consider a company which is expected to generate $1.5 million in revenues and $500,000 in

operating earnings next year. Currently, the company does not use debt financing and has assets

of $2 million. Also, the company is taxed at a rate of 30%. Calculate the net income and return on

equity expected to be generated by the company

and Now, suppose that the company were to change its capital structure by buying back $1 million

of stock and issuing $1 million in debt. Other things remaining the same, what would be the

likely impact of this debt financing on the companys net income and return on equity? The

interest on debt is 5% per annum.