Problem 20-04

Fill in the table using the following information. Assets required for operation: $4,000 Case Afirm uses only equity financing Case Bfirm uses 40% debt with a 10% interest rate and 60% equity Case Cfirm uses 50% debt with a 14% interest rate and 50% equity If the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place.

	A		B		C
Debt outstanding	$		$		$
Stockholders' equity	$		$		$
Earnings before interest and taxes	$600		$600		$600
Interest expense	$		$		$
Earnings before taxes	$		$		$
Taxes (40% of earnings)	$		$		$
Net earnings	$		$		$
Return on stockholders equity	%		%		%

What happens to the return on the stockholders equity as the amount of debt increases? Why did the rate of interest increases in case C?

The return on stockholders' equity -Select-increasesdecreasesincreases and then decreasesdecreases and then increasesdoes not changeItem 22 as the firm becomes -Select-lessmoreItem 23 financially leveraged. The rate of interest increase in case C due to the -Select-increasedeclineItem 24 in the financial risk.