Fill the Table and Using Homemade Leverage, show that you can replicate the payoff of investing in a levered firm.

Lets say I have $5,000.

*Strategy A (Investment in Levered Firm):

Payoff (My Earnings & ROE):

*Strategy B (Homemade Leverage):

Payoff (My Earnings & ROE):

Proposed (with debt; levered) Current (all-equity; unlevered) $10,000 Assets Debt SO $10,000 $5,000 $5,000 $10,000 Equity Debt / Equity Ratio Interest Rate (%) Shares Outstanding 10%, but N/A 10% Share Price ($) $50 $50 Unlevered Firm Levered Firm Recession Normal Expansion Recession Normal Expansion - -- - - EBIT (EBI) $600 $1,200 $1,800 $600 $1,200 $1,800 - - - - - - - Interest Expense - - - - Net Income - - - - EPS - - - 11 - - - - ROA - - - - - - - ROE