Case A—firm uses only equity financing Case B—firm uses 35% debt with an 8% interest rate and 65% equity Case C—firm uses 50% debt with a 10% interest rate and 50% equity If the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ $ $ Stockholders' equity $ $ $ Earnings before interest and taxes $420 $420 $420 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % %
Case A—firm uses only equity financing Case B—firm uses 35% debt with an 8% interest rate and 65% equity Case C—firm uses 50% debt with a 10% interest rate and 50% equity If the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ $ $ Stockholders' equity $ $ $ Earnings before interest and taxes $420 $420 $420 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Fill in the table using the following information.
Assets required for operation: $4,200
Case A—firm uses only equity financing
Case B—firm uses 35% debt with an 8% interest rate and 65% equity
Case C—firm uses 50% debt with a 10% interest rate and 50% equity
If the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place.
| A | B | C | ||||
| Debt outstanding | $ | $ | $ | |||
| $ | $ | $ | ||||
| Earnings before interest and taxes | $420 | $420 | $420 | |||
| Interest expense | $ | $ | $ | |||
| Earnings before taxes | $ | $ | $ | |||
| Taxes (40% of earnings) | $ | $ | $ | |||
| Net earnings | $ | $ | $ | |||
| % | % | % |
What happens to the return on the stockholders’ equity as the amount of debt increases? Why did the rate of interest increases in case C?
The return on stockholders' equity as the firm becomes financially leveraged. The rate of interest increase in case C due to the in the financial risk.
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