Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum.

Complete the following table. Round your answers for dollar values to the nearest dollar. Round your answers for percentage values to one decimal place. Enter your answer in whole dollar. For example, an answer of $1.20 million should be entered as 1,200,000, not 1.20.

		Leverage Ratio (Debt/Total Assets)
		0%			25%			50%
Total assets		$			$			$
Debt (12%)		$			$			$
Equity		$			$			$
Total liabilities and equity		$			$			$
Expected operating income (EBIT)		$			$			$
Less: Interest (@12%)		$			$			$
Earnings before tax		$			$			$
Less: Income tax (@40%)		$			$			$
Earnings after tax		$			$			$
Return on equity				%			%			%
Effect of a 50% Decrease in EBIT to $1,250,000
Expected operating income (EBIT)		$			$			$
Less: Interest (@12%)		$			$			$
Earnings before tax		$			$			$
Less: Income tax (@40%)		$			$			$
Earnings after tax		$			$			$
Return on equity				%			%			%
Effect of a 50% Increase in EBIT to $3,750,000
Expected operating income (EBIT)		$			$			$
Less: Interest (@12%)		$			$			$
Earnings before tax		$			$			$
Less: Income tax (@40%)		$			$			$
Earnings after tax		$			$			$
Return on equity				%			%			%

Determine the percentage change in return on equity of a 50 percent decrease in expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of

0%. Round your answer to one decimal place. Use the minus sign to enter a negative percentage change in ROE if necessary. %

25%. Round your answer to one decimal place. Use the minus sign to enter a negative percentage change in ROE if necessary. %

50%. Round your answer to one decimal place. Use the minus sign to enter a negative percentage change in ROE if necessary. %

Determine the percentage change in return on equity of a 50 percent increase in expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of

0%. Round your answer to one decimal place. %

25%. Round your answer to one decimal place. %

50%. Round your answer to one decimal place. %

Which leverage ratio yields the highest expected return on equity? A leverage ratio of -Select-0%25%50%Item 73 yields the highest expected rate of return on equity.

Which leverage ratio yields the highest variability (risk) in expected return on equity? A leverage ratio of -Select-0%25%50%Item 74 yields the highest variability of expected return on equity.

What assumption was made about the cost of debt (that is, interest rate) under the various capital structures (that is, leverage ratios)? The cost of debt was assumed to -Select-increaseremain constantdecreaseItem 75 under the various capital structures.