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A firm needs $100 to start and has the following expectations:

Sales	$200
Expenses	$185
Tax rate	33% of earnings

What are earnings if the owners invest the $100?
If the firm borrows $40 of the $100 at an interest rate of 10%, what are the firm's net earnings?
What is the return on the owners' investment in each case? Why do the returns differ?
If expenses rise to $194, what will be the returns in each case?
In which case did the returns decline more?
What generalization can you draw from the above?

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