Question: Now, to develop an example which can be presented to PizzaPalaces management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U,

Now, to develop an example which can be presented to PizzaPalace’s management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses $10,000 of 12 percent debt. Both firms have $20,000 in assets, a 40 percent tax rate, and an expected EBIT of $3,000.
Construct partial income statements, which start with EBIT, for the two firms.

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