Fill in the table using the following information. Assets required for operation: $4,000 Case A—firm uses only equity financing Case B—firm uses 30% debt with an 8% interest rate and 70% equity Case C—firm uses 50% debt with a 12% 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 $400 $400 $400 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % % 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.
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Fill in the table using the following information.
Assets required for operation: $4,000
Case A—firm uses only equity financing
Case B—firm uses 30% debt with an 8% interest rate and 70% equity
Case C—firm uses 50% debt with a 12% 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 | $400 | $400 | $400 | |||
| 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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