Section C (4 Mark)Blair Company has Rs5 million in total assets.

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Update on: Jul 30, 2025
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AAFM CWM_LEVEL_2 Question Answer

Section C (4 Mark)

Blair Company has Rs5 million in total assets. The company’s assets are financed with Rs1 million of debt, and Rs4 million of common equity. The company’s income statement is summarized below:

The company wants to increase its assets by Rs1 million, and it plans to finance this increase by issuing Rs1 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, which of the following will occur?

The company’s net income will increase.

The company’s return on assets will fall.

The company’s return on equity will remain the same.

Statements a and b are correct.