Royalton Inc.'s total interest bearing debt is $10,000,000 on which it pays interest at the rate of 5%.Royalton's rate of return on assets is 10%.How much cash flow does leverage add to shareholders equity?

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Quizplus · Accepted Answer

Leverage adds cash flow to shareholders' equity by the difference between the return on assets (10%) and the interest rate (5%) on the debt. The leverage effect is 5% of $10,000,000, which is $500,000.