Show how leverage increases financial risk by calculating the EPS and return on equity for a firm with $1 million in 10 percent debt. The firm also has 50,000 shares outstanding that sell for $40 each. Three states of the economy are possible: a slump under which the firm would have operating income of $150,000, a normal state under which the firm will earn $420,000, and a boom under which the firm will earn $600,000. The firm pays no taxes.

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Slump Normal economy Boom Shares 5000... View the full answer