Calculation of Issue of Debt and Return on Equity

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Einstein Company currently has $800,000 owners’ equity and no long-term debt. Its expected income for 2009 is $100,000 and it is object to a 20 percent tax rate. What is Einstein’s planned return on equity? If Einstein issues $200,000 in debt it anticipates that the interest expense will be $14,000. However it expects to use this money and increase sales such that the income before interest and taxes will be $150,000. If Einstein issues the debt what is its planned return equity?
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April 10, 2013
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