A firm needs $200,000 to start and expects

Sales $300,000

Expenses $285,000

Tax rate 40%

a. What are earnings if the owners invest the $200,000?

b. If the firm borrows 40% of the $200,000 at an interest rate of 10%, what are the firm's net earnings?

c. What is the return on the owners' investment in each case? Why do the returns differ?

d. If expenses rise to $294,000 what will be the returns in each case? e. In which case did the returns decline more? f. What generalization can you draw from the above scenarios?