If anyone can help me it is MOST appreciated!!! If you can show the work that wo
ID: 2659904 • Letter: I
Question
If anyone can help me it is MOST appreciated!!! If you can show the work that would help or post the formula used to get the answers...thanks!
Fill in the table using the following information.
Assets required for operation: $2,000
Case A: Firm uses only equity financing
Case B: Firm uses 30% debt with a 10% interest rate and 70% equity
Case C: Firm uses 50% debt with a 12% interest rate and 50% equity
A B C
Debt Outstanding $ $ $
Stockholder's equity
Earnings before interest and taxes 300 300 300
Interest expense
Earnings before taxes
Taxes (40% of earnings)
Net earnings
Return on stockholder's equity % % %
What happens to the rate of return on the stockholder's investment as the amount of debt increases? Why did the rate of interest increase in Case C?
Explanation / Answer
Working Notes:
A B C
Debt Outstanding 0 600 1000
Stockholder's equity 2000 1400 1000
Earnings before interest and taxes 300 300 300
Interest expense 0 60 120
Earnings before taxes 300 240 180
Taxes (40% of earnings) 120 96 72
Net earnings 180 144 108
Return on stockholder's equity % % % 9.00% 10.29% 10.80%