If the firm borrows 40 of the 100 at an interest rate of 10

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

Sales

$200

Expenses

$185

Tax rate

33% of earnings
  • What are earnings if the owners invest the $100?
  • If the firm borrows $40 of the $100 at an interest rate of 10%, what are the firm's net earnings?
  • What is the return on the owners' investment in each case? Why do the returns differ?
  • If expenses rise to $194, what will be the returns in each case?
  • In which case did the returns decline more?
  • What generalization can you draw from the above?

Reference no: EM13477376

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