Try solving this puzzle.

Your client works for a firm that creates monthly financial statements and monthly financial statement forecasts. In this forecast, long$-$term debt is $1000$kUSD and the interest rate on the long$-$term debt is $10\%,$ compounded monthly. The monthly interest payment is calculated based on the balance in the long$-$term debt line item at the end of the month times the periodic interest rate.

Note that the interest payment is subtracted from EBIT on the income statement, reducing $NI$ and ultimately the earnings retained by the firm.

Fewer retained earnings means that the firm needs to borrow more. How does this impact the firm's borrowing and retained earnings overall?

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