9. Dave Ltd. and Buster Ltd. are both wholesalers of building materi-

als. Each had operating income of $300,000 in 2015. The companies

have total assets of $2,000,000 each. Dave Ltd. is financed wholly by

common shares, which are owned by Dave himself and his wife and

children. Buster Ltd. is finance 40% by common shares (owned by

Buster) and 60% by long-term debt, which carries interest at 6%.

Both companies pay tax at a rate of 25%.

Required

(a) Calculate the return on equity for both companies for 2015.

(b)

Calculate the return on equity for both companies if, in 2016,

the operating income of each was to increase by 15%.

(c) Calculate the return on equity for both companies if, in 2016,

the operating income of each was to decrease by 15%.

(d) Comment on the effect of financial leverage in these two

companies.