A firm needs $100 to start and has the following expectations:
|
Sales
|
$200
|
|
Expenses
|
$185
|
|
Tax rate
|
33% of earnings |
- What are earnings if the owners invest the $100?
- If the firm borrows $40 of the $100 at an interest rate of 10%, what are the firm's net earnings?
- What is the return on the owners' investment in each case? Why do the returns differ?
- If expenses rise to $194, what will be the returns in each case?
- In which case did the returns decline more?
- What generalization can you draw from the above?