Arrow Technology, Inc. (ATI) has total assets of $10,000,000 and expected operating income (EBIT) of $2,500,000. If

Question:

Arrow Technology, Inc. (ATI) has total assets of $10,000,000 and expected operating income (EBIT) of $2,500,000. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum.
a. Complete the following table:

b. Determine the percentage change in return on equity of a 20 percent decrease in expected EBIT from a base level of $2,500,000 with a debt/total assets ratio of
i. 0%
ii. 25%
iii. 50%
c. Determine the percentage change in return on equity of a 20 percent increase in expected EBIT from a base level of $2,500,000 with a debt/total assets ratio of
i. 0%
ii. 25%
iii. 50%
d. Which leverage ratio yields the highest expected return on equity?
e. Which leverage ratio yields the highest variability (risk) in expected return on equity?
f. What assumption was made about the cost of debt (i.e., interest rate) under the various capital structures (i.e., leverage ratios)? How realistic is thisassumption?

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...