Show how leverage increases financial risk by calculating the EPS and return on equity for a firm with $1 million in 10 percent debt.
The firm also has 50,000 shares outstanding that sell for $40 each. Three states of the economy are possible:
a slump under which the firm would have operating income of $150,000,
a normal state under which the firm will earn $420,000, and a boom under which the firm will earn $600,000.
The firm pays no taxes.