Berjaya Maju Bhd. has the total assets of RM5 million. The total assets are financed by RM4 million equity and RM 1 million debt.
Operating Income (EBIT) 1,000,000
Interest Expense 100,000
Earnings before tax (EBT) 900,000
Taxes (40%) 360,000
Net Income 540,000
The company wants to increase its assets by RM1 million, and it plans to finance this increase by issuing RM1 million in new debt. This action will double the company’s interest expense, but its operating income will remain at 20 percent of its total assets, and its average tax rate will remain at 40 percent. If the company takes this action, State what will be the effect to the following:
a) The company’s net income
b) The company’s return on assets
c) The company’s return on equity
Note: State whether the effect is the increase or decrease and show the calculation to prove the answer.