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Effects of Financial Leverage: Model Produces Following Output

The document shows the effects of different levels of financial leverage on key financial metrics. It models a company's income statement, balance sheet, and other metrics like return on equity and weighted average cost of capital at debt ratios of 20%, 50%, and 80%. Higher debt ratios increase financial risk by raising the interest expense and lowering earnings and returns.

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anajana
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70 views1 page

Effects of Financial Leverage: Model Produces Following Output

The document shows the effects of different levels of financial leverage on key financial metrics. It models a company's income statement, balance sheet, and other metrics like return on equity and weighted average cost of capital at debt ratios of 20%, 50%, and 80%. Higher debt ratios increase financial risk by raising the interest expense and lowering earnings and returns.

Uploaded by

anajana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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EFFECTS OF FINANCIAL LEVERAGE

VARIABLES
Debt % Enter
Decimal

INPUT

INPUT

INPUT

20.00%

50.00%

80.00%

Interest Rate on
Debt Enter Decimal

10.00%

14.00%

18.00%

Sales Between
$5,000 and $50,000

$12,000

$12,000

$12,000

Variable Cost Ratio


Enter Decimal

30.00%

30.00%

30.00%

Income Tax Rate


Enter Decimal

40.00%

40.00%

40.00%

Sales Growth Rate


Enter .0 or Decimal

0.00%

0.00%

0.00%

GIVEN DATA
Fixed Costs Enter
Number

Increases 4% per year if


Debt Ratio Increases

INPUT
$

6,800

MODEL PRODUCES FOLLOWING OUTPUT


$
300 $
300
Cash
$
1,200 $
1,200
Receivables
$
1,400 $
1,400
Inventories
$
3,000 $
3,000
Plant (Net)
$
4,100 $
4,100
Equipment (Net)
$
10,000 $
10,000
Total Assets

###
###
###
###
###
$ 10,000

Total Liabilities
Stock ($10)
Tot. Liab./Equity

$
$
$

2,000
8,000
10,000

$
$
$

5,000
5,000
10,000

$ 8,000
$ 2,000
$ 10,000

Sales
Fixed Costs
Variable Costs %
Sales
Total Costs
Earnings Before
Interest and Taxes
Less: Interest

$
$

12,000
6,800

$
$

12,000
6,800

$ 12,000
$ 6,800

$
$

3,600
10,400

$
$

3,600
10,400

$ 3,600
$ 10,400

1,600

1,600

$ 1,600

200

700

$ 1,440

1,400

900

160

$
$

560
840

$
$

360
540

$
$

64
96

Increases if Debt Ratio


Increases (.04/year) on All
Liabilities

Earnings Before
Taxes
Less: Income Taxes
Net Income
EPS
ROE
ROA
WACC
VF

$1.05
10.50%
8.40%
10.80%

$1.08
10.80%
5.40%
10.20%

$0.48
4.80%
0.96%
11.04%

$14,815

$15,686

$14,493

Number of Shares Equals


Stock / $10

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