26. The CFO of a U.S. corporation is considering borrowing £500 million at a cost of 4% per year. The corporation will deploy the proceeds received to expand its lines of business.

a. Explain what will happen to corporate earnings if the proceeds invested from the funds raised can earn 7% per year.

b. Explain what will happen to corporate earnings if the proceeds invested from the funds raised can earn 1% per year.

c. Based on your answers to

(a) and (b), describe the advantages and disadvantages of the use of financial leverage.