Complete the Following Chart to Illustrate How Leverage Can Increase

question 99

Essay

Complete the following chart to illustrate how leverage can increase investors' returns while concurrently exposing them to large losses.
Facts: Calabria Corporation is a new company and has only one asset,its cash of $105,000 from the sale of common shares.
In scenario 1,Calabria invests the $105,000 in a venture that will pay out either $85,000 or $135,000 at the end of one year,depending on the success of the venture.
In scenario 2,Calabria borrows $210,000 at 7% interest and invests $315,000 in the same project outlined in Scenario 1.The payout will be $255,000 ($85,000 × 3)or $405,000 ($135,000 × 3)because it invests three times as much.

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Definitions:

Current Profitability

A measure of a company's financial performance in the present or most recent accounting period, indicating the net income earned.

Idle Capacity

Unused production capacity or resources that are not being utilized to their full potential.

Special Discounted Price

A reduced price offered on a product or service, often to stimulate sales, clear inventory, or reward customers.

Opportunity Cost

The potential benefit that is foregone from not following the best alternative action or decision.