Chapter 14, Problem 7BTN

To determine

Return on Equity:

Return on equity is profitability ratio which measures a company’s ability to generate profit from the investment of shareholders. It is ascertained by dividing the net income after interest expense by the shareholder’s equity of the company.

Note Payable:

Note payable is a negotiable debt instrument for borrowing funds with specified rate of interest and maturity.

:

1. Using return on equity as the decision criterion, show computations to support or reject the expansion if interest on the $100,000 note is (a) 10% (b) 15% (c) 16% (d) 17% (e) 20%

2. What general rule do the results in part 1 illustrate?