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Effects of Financial Leverage: Model Produces Following Output

This document models the effects of different levels of financial leverage on key financial metrics. It shows inputs for debt percentage, interest rates, sales, costs, and taxes. The model then produces outputs for total assets, liabilities, equity, income, earnings per share, return on equity, return on assets, and weighted average cost of capital at debt percentages of 20%, 50%, and 80%. Higher debt ratios correspond to higher interest rates, lower net income and EPS, and lower returns while increasing the WACC.

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Arun
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171 views1 page

Effects of Financial Leverage: Model Produces Following Output

This document models the effects of different levels of financial leverage on key financial metrics. It shows inputs for debt percentage, interest rates, sales, costs, and taxes. The model then produces outputs for total assets, liabilities, equity, income, earnings per share, return on equity, return on assets, and weighted average cost of capital at debt percentages of 20%, 50%, and 80%. Higher debt ratios correspond to higher interest rates, lower net income and EPS, and lower returns while increasing the WACC.

Uploaded by

Arun
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 INPUT INPUT INPUT


Debt % Enter
Decimal 20.00% 50.00% 80.00%
Interest Rate on Increases 4% per year if
Debt Enter Decimal 10.00% 14.00% 18.00% Debt Ratio Increases
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 INPUT


Fixed Costs Enter
Number $ 6,800

MODEL PRODUCES FOLLOWING OUTPUT


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

Total Liabilities $ 2,000 $ 5,000 $ 8,000


Stock ($10) $ 8,000 $ 5,000 $ 2,000
Tot. Liab./Equity $ 10,000 $ 10,000 $ 10,000

Sales $ 12,000 $ 12,000 $ 12,000


Fixed Costs $ 6,800 $ 6,800 $ 6,800
Variable Costs %
Sales $ 3,600 $ 3,600 $ 3,600
Total Costs $ 10,400 $ 10,400 $ 10,400
Earnings Before
Interest and Taxes $ 1,600 $ 1,600 $ 1,600
Less: Interest $ 200 $ 700 $ 1,440 Increases if Debt Ratio
Increases (.04/year) on All
Liabilities
Earnings Before
Taxes
$ 1,400 $ 900 $ 160
Less: Income Taxes
$ 560 $ 360 $ 64
Net Income $ 840 $ 540 $ 96

EPS Number of Shares Equals


$1.05 $1.08 $0.48 Stock / $10
ROE 10.50% 10.80% 4.80%
ROA 8.40% 5.40% 0.96%
WACC 10.80% 10.20% 11.04%
VF $14,815 $15,686 $14,493

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