Fill in the table using the following information. Assets required for operation: $10,800 Firm A uses only equity financing Firm B uses 40% debt with an 8% interest rate and 60% equity Firm C uses 50% debt with a 12% interest rate and 50% equity Firm D uses 50% preferred stock financing with a dividend rate of 12% and 50% equity financing Earnings before interest and taxes: $1,620 If your answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place.

	A		B		C		D
Debt	$		$		$		$
Preferred stock	$		$		$		$
Common stock	$		$		$		$
Earnings before interest and taxes	$1,620.00		$1,620.00		$1,620.00		$1,620.00
Interest expense	$		$		$		$
Earnings before taxes	$		$		$		$
Taxes (40% of earnings)	$		$		$		$
Preferred stock dividends	$		$		$		$
Income available to common stockholders	$		$		$		$
Return on common stock	%		%		%		%

What happens to the common stockholders' return on equity as the amount of debt increases? Why is the rate of interest greater in case C? Why is the return lower when the firm uses preferred stock instead of debt?

Other things equal, the return on common stock -Select-increasesdecreasesItem 37 as the firm uses financial leverage. As the firm becomes -Select-lessmoreItem 38 financially leveraged (-Select-increasedecreaseItem 39 in financial risk), the rate of interest will increase. The return is lower when the firm uses preferred stock instead of debt because the -Select-preferred stock dividendsinterest paymentsItem 40 are not tax deductible as opposed to the -Select-preferred stock dividendsinterest paymentsItem 41 .

Which type of financing involves less risk for the firm?

Assuming a comparable use, -Select-preferred stock financingdebt financingItem 42 is less risky to the firm.