SlideShare a Scribd company logo
2. Fill in the table using the following information.
Assets required for operation: $2,000
Case A—firm uses only equity financing
Case B—firm uses 30% debt with a 10% interest rate and 70%
equity
Case C—firm uses 50% debt with a 12% interest rate and 50%
equity
A B C
A B C
Debt outstanding $ $ $
Stockholders’ equity
Earnings before interest and taxes 300 300 300
Interest expense
Earnings before taxes
Taxes (40% of earnings)
Net earnings
Return on stockholders’ equity % % %
What happens to the rate of return on the stockholders’
investment as
the amount of debt increases? Why did the rate of interest
increase in
case C?

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