Question 1: Arrow Technology (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 debt will be 12% per annum. Complete the following table and report the return on equities for each the three scenarios. You can use the attached excel template to complete the calculations (_fmg_homework6_excel.xlsx Download _fmg_homework6_excel.xlsx). Which leverage ratio yields the highest expected return on equity? Which leverage ratio yields the highest variability (risk) in expected return on equity? What assumptions was made about the cost of debt (that is, the interest rates) under the various capital structures (that is, the leverage ratio)? How realistic is the assumption? Based on your calculation, answer the following questions.

What is the earning after tax, when debt / asset ratio = 25% and EBIT = 2,500,000?

Group of answer choices

1,140,000

1,320,000

1,500,000

2,000,000

When the EBIT drops to from 2,500,000 to 2,000,000,

change of ROE(leverage = 0%) = 3%.

change of ROE(leverage = 50%) = ?

Group of answer choices

-2%

-6%

-8%

-4%

When the EBIT increases from 2,500,000 to 3,000,000,

change in ROE (leverage = 0%) = 3%

Change in ROE(leverage = 25%) = ?

Group of answer choices

5%

4%

3%

6%

From the above calculation, we observe.

With higher financial leverage, when EBIT increases, ROE increases ___; when EBIT decreases, ROE decreases ___.

Group of answer choices

less, more

more, less

more, more

less, less