EFFECTS OF FINANCIAL LEVERAGE

VARIABLES INPUT INPUT INPUT

Debt % Enter
Decimal 20.00% 50.00% 80.00%
Interest Rate on Increases 4% per year if
Debt Enter Decimal 10.00% 14.00% 18.00% Debt Ratio Increases
Sales Between
$5,000 and $50,000 $12,000 $12,000 $12,000
Variable Cost Ratio
Enter Decimal 30.00% 30.00% 30.00%
Income Tax Rate
Enter Decimal 40.00% 40.00% 40.00%
Sales Growth Rate
Enter .0 or Decimal 0.00% 0.00% 0.00%

GIVEN DATA INPUT

Fixed Costs Enter
Number $ 6,800

MODEL PRODUCES FOLLOWING OUTPUT

Cash $ 300 $ 300 $ 300
Receivables $ 1,200 $ 1,200 $ 1,200
Inventories $ 1,400 $ 1,400 $ 1,400
Plant (Net) $ 3,000 $ 3,000 $ 3,000
Equipment (Net) $ 4,100 $ 4,100 $ 4,100
Total Assets $ 10,000 $ 10,000 $ 10,000

Total Liabilities $ 2,000 $ 5,000 $ 8,000

Stock ($10) $ 8,000 $ 5,000 $ 2,000
Tot. Liab./Equity $ 10,000 $ 10,000 $ 10,000

Sales $ 12,000 $ 12,000 $ 12,000

Fixed Costs $ 6,800 $ 6,800 $ 6,800
Variable Costs %
Sales $ 3,600 $ 3,600 $ 3,600
Total Costs $ 10,400 $ 10,400 $ 10,400
Earnings Before
Interest and Taxes $ 1,600 $ 1,600 $ 1,600
Less: Interest $ 200 $ 700 $ 1,440 Increases if Debt Ratio
Increases (.04/year) on All
Liabilities
Earnings Before
Taxes
$ 1,400 $ 900 $ 160
Less: Income Taxes
$ 560 $ 360 $ 64
Net Income $ 840 $ 540 $ 96

EPS Number of Shares Equals

$1.05 $1.08 $0.48 Stock / $10
ROE 10.50% 10.80% 4.80%
ROA 8.40% 5.40% 0.96%
WACC 10.80% 10.20% 11.04%
VF $14,815 $15,686 $14,493