Earnings before interest and taxes remains the same

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Gatwick Ltd. has after tax profits (net income) of $1,000,000 and no debt. The owners have a $10 million investment in the business. If they borrow $3 million at 10% and use it to retire stock, how will the return on their investment (equity) change if earnings before interest and taxes remains the same? Assume a flat 40% tax rate and that the loan reduces equity dollar for dollar. A business owner’s return on investment or equity is ROI=ROE=Net Income/Equity. Show all steps in your answer.

Reference no: EM131070986

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