Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operat

Question

Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating

income (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost of

this debt will be 12 percent per annum.

a. Complete the following table:

Leverage Ratio (Debt/Total Assets)

0% 25% 50%

Total assets ______ ______ ______

Debt (at 12% interest) ______ ______ ______

Equity ______ ______ ______

Total liabilities and equity ______ ______ ______

Expected operating income (EBIT) ______ ______ ______

Less: Interest (at 12%) ______ ______ ______

Earnings before tax ______ ______ ______

Less: Income tax at 40% ______ ______ ______

Earnings after tax ______ ______ ______

Return on equity ______ ______ ______

Effect of a 20% Decrease in EBIT to $2,000,000

Expected operating income (EBIT) ______ ______ ______

Less: Interest (at 12%) ______ ______ ______

Earnings before tax ______ ______ ______

Less: Income tax at 40% ______ ______ ______

Earnings after tax ______ ______ ______

Return on equity ______ ______ ______

Effect of a 20% Increase in EBIT to $3,000,000

Expected operating income (EBIT) ______ ______ ______

Less: Interest (at 12%) ______ ______ ______

Earnings before tax ______ ______ ______

Less: Income tax at 40% ______ ______ ______

Earnings after tax ______ ______ ______

Return on equity ______ ______ ______

c. Determine the percentage change in return on equity of a 20 percent increase

in expected EBIT from a base level of $2.5 million with a debt-to-total-assets

ratio of

i. 0%

ii. 25%

iii. 50%

I only Need PART C.... I HAVE THE REST I JUST CAN NOT figure out part C.

Explanation / Answer

c. Determine the percentage change in return on equity of a 20 percent increase in expected EBIT from a base level of $2.5 million with a debt-to-total-assets

ratio of i. 0% -50.00% ii. 25% -23.53% iii. 50% 14.29%

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