Now consider the fact that EBIT is not known with certainty, but rather has the following probability distribution:

Economic State               Probability           EBIT

Bad                                        0.25                $2,000

Average                                 0.50                 3,000

Good                                     0.25                  4,000

Redo the part A analysis for firms U and L, but add basic earning power (BEP), return on investment (ROI), [defined as (net income + interest)/(debt + equity)], and the times-interest-earned (TIE) ratio to the outcome measures. Find the values for each firm in each state of the economy, and then calculate the expected values. Finally, calculate the standard deviation and coefficient of variation of ROE. What does this example illustrate about the impact of debt financing on risk and return?