3. Fill in the table using the following information. Assets required for operation: $10,000 Firm A uses only equity financing Firm B uses 30% debt with a 6% interest rate

3. Fill in the table using the following information. Assets required for operation: $10,000 Firm A uses only equity financing Firm B uses 30% debt with a 6% interest rate and 70% equity Firm C uses 50% debt with a 10% interest rate and 50% equity Firm D uses 50% preferred stock financing with a dividend rate of 10% and 50% equity financing Earnings before interest and taxes: $1,000 A                         B                      C                          D Debt outstanding                                                           $                                   $                              $                                    $ Stockholders’ equity Earnings before interest and taxes 300 300 300 Interest expense Earnings before taxes Taxes (40% of earnings) Net earnings Return on stockholders’ equity                                                 %                                          %                              %                             % happens to the return on the stockholders’ investment 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? Why does the use of preferred stock involve less risk for the firm than a comparable use of debt financing?

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