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Suppose we are given the information about two companies, one is funded only with
equity capital and one with debt and equity capital.
Particulars U L
DEBT $0.00 $250,000.00
Equity $500,000.00 $250,000.00
Kd 8.00% 8.00%
Sales $400,000.00 $400,000.00
Variable Cost $200,000.00 $200,000.00
Fixed Cost $100,000.00 $100,000.00
TAX 20.00% 20.00%
EBIT $100,000.00 $100,000.00
INTEREST $0.00 $20,000.00
EBT $100,000.00 $80,000.00
TAX $20,000.00 $16,000.00
EAT $80,000.00 $64,000.00
Financial Leverage 1.00 1.25
ROE 16.00% 25.60%
Suppose we are given the information for two years for one company only which has increased its debt.