The effect of leverage

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The Effect of Leverage on Firm Earnings

               
                  
A firm needs $100 to start and has the following expectations:              
                  
                  
Sales$200                 
Expenses$185                 
Tax rate 33% of earnings                
                  
                  
a. What are earnings if the firm owners invest the $100 thus utilizing no financial leverage? Tax and net earnings values should be rounded to 2 decimal places.   
                  
b. If the firm borrows (utilizes financial leverage) $40 of the $100 at an interest rate of 10%, what are the firm's net earnings? Tax and net earnings values should be rounded to 2 decimal places.
                  
c. What is the return on equity when financial leverage is and is not utilized? Why do the returns differ? ROE results should be shown with 2 decimal places.    
                  
d. If expenses increase to $194, what will be the new return on equity values for each scenario? ROE results should be shown with 2 decimal places.    
                  
e. Did the returns decline more when financial leverage was or was not utilized?            
                  
f. How does the use of financial leverage effect a firm's earnings?  When is using financial leverage beneficial?  When is it disadvantageous?     
                  
                  
                  
                  
                  
                  
                  
                  
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