Why is leverage sometimes called a two edged sword

Assignment Help Accounting Basics

Reference no: EM131920635

Problem

Mr. Agirich has provided the following information and ratios for the Aggie Farms 20X0 operations: Average Total Assets = $840,000 Average Total Liabilities = $395,000 Net Farm Income before taxes = $ 74,800 Interest Paid and accrued = $ 26,000 Income Taxes Paid = $ 9,000 Based on this information, what is the projected Rate of Return on Equity after taxes, re, for Aggie Farms in 20X1? (Assume that the tax rate, t, is 15% and the Rate of Return on Assets before taxes, ra, will continue as reflected for 20X0 and that the future cost of debt, i, will be 10%. Use the equation presented in class to calculate the projected re. Use the information above to calculate ra. Remember that Net Farm Income before taxes is from the Income statement and is after interest. What might Mr. Agirich do to increase the rate of return on equity after taxes? What is the projected re for Aggie Farms in 20X1, if Mr. Agirich projects ra to be 5%? Keep everything else the same as before. Mr. Agirich feels he needs to increase re to 13.6%. If he cannot increase return on assets nor decrease interest cost or the tax rate, how much additional debt will he need to incur to achieve the desired rate level of profitablilty Suppose Mr. Agirich borrows the additional money (problem 4). What is the projected re for Aggie Farms for 20X1, if Mr. Agirich projects the ra to be 5%? Keep everything else the same. Why is leverage sometimes called a two edged sword?

Reference no: EM131920635

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