A firm needs $800 to start and has the following expectations:
Sales $1,600
Expenses $1,450
Tax rate 33% of earnings
a. What are earnings if the owners invest (use their own money) for the $800 needed to start?
b. If the firm borrows $400 of the $800 at an interest rate of 10%, what are the firm's net earnings?
c. What is the return on the owners' investment in each case? Why do the returns differ?
d. If expenses rise to $1,500, what will be the returns in each case?
e. In which case did the returns decline more?
f. What generalization can you draw from the above?