Rock Star Ltd., has earned 16% return on Capital Employed amounting to 4000000, while it has 14% Long-term Borrowings amounting to 2000000. Is it worth while to raise Long-term Debts? If Tax Rate is 40%, what is the loss or gain % to proprietors of fund?
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Explanation:
Total earning
4000000×16% =64000
total interest on borrowing =280000
640000-280000 =360000
calculation of tax
360000×40% = 144000
net earning
360000-144000 = 216000
216000 is 10.8% of 2000000
gain = 10.8%
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