Relating profitability to financial leverage.

a. Compute the rate of return on common shareholders' equity in each of the following independent cases.

b. In which cases is leverage working to the advantage of the common shareholders?

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Average Average Common Average Interest- Share- Rate of After-tax Cost of Interest- Total Bearing holders' Return Bearing Case Assets Debt Equity on Assets Debt A $200 $100 $100 6% 6% B 200 100 100 8% 6% C 200 120 80 8% 6% D 200 100 100 4% 6% .. E 200 50 100 6% 6% F 200 50 100 5% 6%