chp 20-05

are given the following information concerning a firm: ets required for operation: $5,700,000 venues: $9,000,000 erating expenses: $8,350,000 come tax rate: 40%. anagement faces three possible combinations of financing: 1. 100% equity financing 2. 35% debt financing with a 6% interest rate 3. 70% debt financing with a 6% interest rate a. What is the net income for each combination of debt and equity financing? Round your answers to the nearest doliar. 1 Net inceme 2 $ 3 5 b. What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 Return on equity 2 % 3 \% % c. If the interest rate had been 12 pereent instead of 6 pereent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Retum on equity 1 % 2 % 3 d. What is the implication of the use of financial leverage when interest rates change? The use of financial leverage is ikely to the return to the common stockholders if the rate of interest is low. If the rate of interest exceeds (after adjusting for taxes) the return earned on the borrowed funds, the return to the common stockholder is likely to by the use of financial leverage