Show how leverage increases financial risk

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Reference no: EM131984694

Show how leverage increases financial risk by calculating the EPS and return on equity for a firm with $1 million in 10 percent debt.

The firm also has 50,000 shares outstanding that sell for $40 each. Three states of the economy are possible:

a slump under which the firm would have operating income of $150,000,

a normal state under which the firm will earn $420,000, and a boom under which the firm will earn $600,000.

The firm pays no taxes.

Reference no: EM131984694

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