eBookProblem 20-04Fill in the table using the following information.Assets required for operation: $4,000Case A—firm uses only equity financingCase B—firm uses 35% debt with an 8% interest rate and 65% equityCase C—firm uses 50% debt with a 10% interest rate and 50% equityIf the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. ABCDebt outstanding$ $ $ 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.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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.

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