Question

Problem 20-02 Fill in the table using the following information Assets required for operation: $2,400 Case A-firm uses only equity financing Case B-firm uses 40% debt with an 8% interest rate and 60% equity Case C-firm uses 50% debt with a 10% interest rate and 50% equity If your 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 C Debt outstanding $ $ 1200 0 960 Stockholders' equity $ 1440 $ 2400 1200 Earnings before interest and taxes $432.00 $432.00 $432.00 Interest expense $ $ $ 0 77 120 Earnings before taxes $ $ 432 355 312 Taxes (40% of earnings) $ 173 142 125 Net earnings $ $ $ 259 213 187 Return on stockholders' equity 10.8 % 14.8 % 15.6 What happens to the rate of return on the stockholders' investment as the amount of debt increases? The rate of return on the stockholders' investment increases as the amount of debt increases.

Answer 1

	A	B	C
Debt Outstanding	0	$960	$1,200
Stake holder's equity	$2,400	$1,440	$1,200
Earning before interest and taxes	$432	$432	$432
Interest expense	0	$76.80	$120.0
Earning before taxes	$432	$355.20	$312.00
Taxes (40% of earnings)	$172.80	$142.08	$124.80
Net earnings	$259.20	$213.12	$187.20
Return of stokeholder's equity	10.8%	14.8%	15.6%

the rate of return on the stockholder's investment increases as the amount of debt increases