eBook
Problem 20-04
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 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 |
$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.
|
Definition Definition Assets available to stockholders after a company's liabilities are paid off. Stockholders’ equity is also sometimes referred to as owner's equity. A stockholders’ equity or book value generally includes common stock, preferred stock, and retained earnings and is an indicator of a company's financial strength.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 1 images
