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.

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?