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Need Question E) Arrow Technology, Inc. (ATI) has...

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Need Question E) Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum. a. Complete the following table: Leverage Ratio (Debt/Total Assets) 0% 25% 50% Total assets ______ ______ ______ Debt (at 12% interest) ______ ______ ______ Equity ______ ______ ______ Total liabilities and equity ______ ______ ______ Expected operating income (EBIT) ______ ______ ______ Less: Interest (at 12%) ______ ______ ______ Earnings before tax ______ ______ ______ Less: Income tax at 40% ______ ______ ______ Earnings after tax ______ ______ ______ Return on equity ______ ______ ______ Effect of a 20% Decrease in EBIT to $2,000,000 Expected operating income (EBIT) ______ ______ ______ Less: Interest (at 12%) ______ ______ ______ Earnings before tax ______ ______ ______ Less: Income tax at 40% ______ ______ ______ Earnings after tax ______ ______ ______ Return on equity ______ ______ ______ Effect of a 20% Increase in EBIT to $3,000,000 Expected operating income (EBIT) ______ ______ ______ Less: Interest (at 12%) ______ ______ ______ Earnings before tax ______ ______ ______ Less: Income tax at 40% ______ ______ ______ Earnings after tax ______ ______ ______ Return on equity ______ ______ ______ e)Which leverage ratio yields the highest variability (risk) in expected return on equity?

 

Paper#7169 | Written in 18-Jul-2015

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