Assume we have two companies that are exactly alike in all ways, except one has debt and equity, and the other just has equity (no debt). We will call the one without the debt unleveraged (U) and the one with the debt we will call leveraged (L). We will look at the income statement under the different expected scenarios.

For each firm, first complete the financial statements, then calculate the following ratios for each scenario: ROE, ROA, ROI, ROIC, Fixed Asset Turnover, Total Asset Turnover, Operating Profit Margin, and Net Income Margin.

First, lets look at the balance sheet and income state of Firm U.

Firm U B/S

Assets Liabilities & Owners Equity

Current Assets $ 500 Debt $ 0

Fixed Assets $ Equity $1000

Total Assets $1000 Total L & OE $

Firm U I/S

Business Condition

Awesome Good Expected Bad Catastrophic

Revenue $150 $100 $75 $10

Oper Costs Fixed 45

Variable 60 40 30 20 2

Total Oper Costs___________$105____________________________________________________

Operating Income (EBIT) $495

Interest (i = 10%)

Earnings before taxes (EBT)

Taxes (t = 40%)_____________________________________________________________________

Net Income (NI) $ $ $ $ $

Now, lets take a look at Firm L, which has debt.

Firm L B/S

Assets Liabilities & Owners Equity

Current Assets $ 500 Debt $

Fixed Assets $ Equity $ 500

Total Assets $1000 Total L & OE

Firm L I/S

Business Condition

Awesome Good Expected Bad Catastrophic

Revenue $150 $100 $75 $10

Oper Costs Fixed 45

Variable 60 40 30 20 2

Total Oper Costs___________$105____________________________________________________

Operating Income (EBIT) $495

Interest (i = 10%)

Earnings before taxes (EBT)

Taxes (t = 40%)_____________________________________________________________________

Net Income (NI) $ $ $ $ $