1. The Connecticut Computer Company has the following selected financial results.

10% Debt 40% Debt 75% Debt

Debt $ 10,000 $ 40,000 $ 75,000

Equity 90,000 60,000 25,000

Total Capital $100,000 $100,000 $100,000

Shares @ $5 18,000 12,000 5,000

EBIT $18,000 $18,000 $18,000

Interest ( 15%) 1,500 6,000 11,250

EBT $16,500 $12,000 $ 6,750

Tax (40%) 6,600 4,800 2,700

Net Income $ 9,900 $ 7,200 $ 4,050

ROE 11.0% 12.0% 16.2%

EPS $.55 $.60 $.81

How is increasing leverage affecting financial performance? What overall effect might the changes have on the market price of Connecticuts stock? Why? (Words only. Hint: consider the move from 10% to 40% and that from 40% to 75% separately.)