The effect of leverage on firm earnings

Reference no: EM13749044

The Effect of Leverage on Firm Earnings

A firm needs $100 to start and has the following expectations:

Sales $200
Expenses $185
Tax rate 33% of earnings

a. What are earnings if the firm owners invest the $100 thus utilizing no financial leverage? Tax and net earnings values should be rounded to 2 decimal places.

b. If the firm borrows (utilizes financial leverage) $40 of the $100 at an interest rate of 10%, what are the firm's net earnings? Tax and net earnings values should be rounded to 2 decimal places.

c. What is the return on equity when financial leverage is and is not utilized? Why do the returns differ? ROE results should be shown with 2 decimal places.

d. If expenses increase to $194, what will be the new return on equity values for each scenario? ROE results should be shown with 2 decimal places.

e. Did the returns decline more when financial leverage was or was not utilized?

f. How does the use of financial leverage effect a firm's earnings? When is using financial leverage beneficial? When is it disadvantageous?

Reference no: EM13749044

Questions Cloud

Describe the role of interpersonal communication : Describe the role of interpersonal communication both as a manager and as an employee. What specific techniques have you used to overcome barriers to communication? Be sure to specify your role in the communication.

Describe typical components of a health care it department : Describe typical components of a health care IT department and Identify various clinical and administrative applications of IT in health care organizations

Describe the movements and comunities led by ann lee : Describe the movements and comunities led by Ann Lee, George Rapp, Joseph Smith Jr., Ezra Stiles Ely, Charles Grandisom Finney, and other, and their respective social agendas

How many management functions were originally proposed : How many management functions were originally proposed by Henri Fayol

The effect of leverage on firm earnings : What are earnings if the firm owners invest the $100 thus utilizing no financial leverage? Tax and net earnings values should be rounded to 2 decimal places.

Write a book review of celia a slave : Write a book review of Celia A Slave. Melton McLaurin notes that the Celia's defense "challenged the role of white man as the protector of women within southern society.

Describe the company''s supply chain : Describe the company's supply chain, Identify a process internal to the company that you wish to analyze. Describe the process internal to the company that you wish to analyze.

Webflix maintains customer data in a 2d-array : WebFlix maintains customer data in a 2D-array called WF. Where the rows correspond to the customers and the columns correspond to films that it rents. An entry WF[i,j] indicates the number of times a customer has rented a film.WebFlix wants to find s..

What document reveal about ongoing conflicts social justice : What do documents reveal about ongoing conflicts over political rights and social justice.

User Account

All Pages