Debt ratio Total Assets Debt

0% 500 0
10.0% 500 50
20.0% 500 100
30.0% 500 150
40.0% 500 200
50.0% 500 250
60.0% 500 300
70.0% 500 350
80.0% 500 400
90.0% 500 450
100.0% 500 500
Equity Shares
500 25.00
450 22.50
400 20.00
350 17.50
300 15.00
250 12.50
200 10.00
150 7.50
100 5.00
50 2.50
0 -
P13-16 Firm R
Sales units 75000 100,000 125,000 25.0% 75000
Price $/unit 2.00 2.00 2.00 2.50
VC $/unit 1.70 1.70 1.70 1.00
FC $ 6,000 6,000 6,000 62,500
Interest $ 10,000 10,000 10,000 17,500
Tax 40.0% 40.0% 40.0% 40.0%

Revenue $ 150,000 200,000 250,000 187,500

Variable Cost $ (127,500) (170,000) (212,500) (75,000)
Fixed Cost $ (6,000) (6,000) (6,000) (62,500)
EBIT $ 16,500 24,000 31,500 31.3% 50,000
Interest $ (10,000) (10,000) (10,000) (17,500)
EBT $ 6,500 14,000 21,500 32,500
Tax $ (2,600) (5,600) (8,600) (13,000)
NPAT $ 3,900 8,400 12,900 53.6% 19,500

DOL 1.25 Less Operational risk

DFL 1.71 More financial risk
Total Leverage 2.14 Same total risk
2.14
Firm W
100,000 125,000 25.0%
2.50 2.50
1.00 1.00
62,500 62,500
17,500 17,500
40.0% 40.0%

250,000 312,500
(100,000) (125,000)
(62,500) (62,500)
87,500 125,000 42.9%
(17,500) (17,500)
70,000 107,500
(28,000) (43,000)
42,000 64,500 53.6%

1.71 More operational risk

1.25 Less Financial risk
2.14 Same total risk
2.14
 Scenario 1 Scenario 2
P13-27 Probability 0.30 0.40

Sales 600,000 900,000

Variable Cost (240,000) (360,000)
Fixed Cost (300,000) (300,000)
a EBIT 60,000 240,000
Tax (24,000) (96,000)
NPAT 36,000 144,000

b Debt Ratio Total Asset Debt Equity Shares Before tax rd after tax

0% 1,000,000 - 1,000,000 40,000 0% 0%

15.00% 1,000,000 150,000 850,000 34,000 8% 5%
30.00% 1,000,000 300,000 700,000 28,000 10% 6%
45.00% 1,000,000 450,000 550,000 22,000 13% 8%
60.00% 1,000,000 600,000 400,000 16,000 17% 10%

d 0% Scen1 0.90 0.30 (2.70) 7.29

0% Scen2 3.60 0.40 - -
0% Scen3 6.30 0.30 2.70 7.29
EPS 3.60 4.37
2.09 0.581
SD CV
15% Scen1 0.85 (3.18) 10.09
15% Scen2 4.02 - -
15% Scen3 7.20 3.18 10.09
EPS 4.02 6.05
2.46 0.612

30% Scen1 0.64 (3.86) 14.88

30% Scen2 4.50 - -
30% Scen3 8.36 3.86 14.88
EPS 4.50 8.93
2.99 0.664

45% Scen1 0.04 (4.91) 24.10

45% Scen2 4.95 - -
45% Scen3 9.86 4.91 24.10
EPS 4.95 14.46
3.80 0.768

60% Scen1 (1.58) (6.75) 45.56

60% Scen2 5.18 - -
60% Scen3 11.93 6.75 45.56
 EPS 5.18 27.34
5.23 1.010

f Debt Ratio 0% 15.00% 30.00% 45.00% 60.00%

EPS 3.60 4.02 4.50 4.95 5.18
CV 0.58 0.61 0.66 0.77 1.01

EPS vs Debt Ratio

6.00 1

5.18
4.95 1.01 1
5.00
4.50
4.02
4.00 0
3.60 0.77

0.66
3.000.58 0.61 0

2.00 0

1.00 0

- -
0% 15% 30% 45% 60%
EPS CV

g EBIT 60,000 240,000 420,000

0% 0.90 3.60 6.30
30% 0.64 4.50 8.36
60% (1.58) 5.18 11.93

EPS vs EBIT
14.00

12.00

10.00

8.00

6.00

4.00

2.00

-
 8.00

6.00

4.00

2.00

-
60,000 240,000
(2.00)

(4.00)
0% 30% 60%

h Debt ratio EPS/rs Share Price

0% 36.00
15% 38.32
30% 38.79
45% 35.36
60% 25.88

i to maximize EPS 60% debt

to maximize share price 30% debt selected
Scenario 3
0.30

1,200,000
(480,000)
(300,000)
420,000
(168,000)
252,000
c
annual
rs wacc interest
10% 10% -
11% 10% 12,000
12% 10% 30,000
14% 11% 58,500
20% 14% 102,000
 1.20

5.18
4.95 1.01 1.00

0.80
0.77

0.60

0.40

0.20

-
45% 60%

EBIT
000 420,000

0% 60%