Show How Leverage Increases Financial Risk by Calculating the EPS

question 88

Essay

Show how leverage increases financial risk by calculating the EPS and return on shares for a firm with $1 million in 10% debt. The firm also has 50,000 shares outstanding that sell for $40 each. Three states of the economy are possible: a slump under which the firm would have operating income of $150,000, a normal state under which the firm will earn $420,000, and a boom under which the firm will earn $600,000. The firm pays no taxes.

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Definitions:

Baby Boomers

The demographic group born approximately between 1946 and 1964, known for being part of a significant increase in birth rates post-World War II.

Immigrants

Individuals who move from one country to another, typically for the purpose of permanent residency or employment.