Watson Waterbed Works Inc. has an EBIT of $2.75 million, can borrow at 14% interest, and...

Watson Waterbed Works Inc. has an EBIT of $2.75 million, can borrow at 14% interest, and pays combined state and federal income taxes of 30%. It currently has no debt and is capitalized by equity of $12 million. The firm has 1.5 million shares of common stock outstanding that trade at book value.

Calculate Watson's Net Income, ROE and EPS currently and at capital structures that have 20%, 40%, 60%, and 80% debt. Round ROE to one decimal place. Round EPS to two decimal places. Round your Net income answers to the nearest whole thousands. For example, an answer of $200 thousands should be entered as 200, not 200000.

	All Equity	20% Debt	40% Debt	60% Debt	80% Debt
Net Income ($000)	$	$	$	$	$
ROE	%	%	%	%	%
EPS	$	$	$	$	$

Compare the EPS at the different leverage levels, and the amount of change between levels as leverage increases. What happens to the effect of more debt as leverage increases from a little to a lot?
The effect of leverage accelerates as (Less/More) leverage is added.

Expert Solution

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