MUST BE DONE IN EXCELThe Effect of Leverage on Firm Earn.docx
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A firm needs $100 to start its business. It expects $200 in sales and $185 in expenses. The document asks the reader to calculate the firm's earnings and return on equity in two scenarios: 1) with no financial leverage where the owners invest the full $100, and 2) with financial leverage where the firm borrows $40 at 10% interest. It also asks how the firm's earnings and returns are affected by increasing expenses and whether financial leverage is beneficial or disadvantageous in different situations.
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MUST BE DONE IN EXCELThe Effect of Leverage on Firm Earn.docx
- 1. **MUST BE DONE IN EXCEL** The Effect of Leverage on Firm Earnings
- 2. A firm needs $100 to start and has the following expectations:
- 3. Sales $200
- 4. Expenses $185 Tax rate 33% of earnings
- 6. 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.
- 7. 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.
- 8. 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?
- 9. f. How does the use of financial leverage effect a firm's earnings? When is using financial leverage beneficial? When is it disadvantageous?