15-7 M&M (Debt Policy Doesnt Matter) Example- River Cruises- All Equity Financed Debt replicated by investors Outcome State of the economy Slump Expected Boom Earnings on two shares $1.502.50 3.50 LESS: Interest @10% $1001.00 1.00 Net earnings on investment $.501.50 2.50 Return on S10 investment 5% 15 25 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001©The McGraw-Hill Companies, Inc.,2001 15- 7 Irwin/McGraw-Hill Example - River Cruises - All Equity Financed - Debt replicated by investors Returnon $10 investment 5% 15% 25% Net earnings on investment $.50 1.50 2.50 LESS :Interest @10% $1.00 1.00 1.00 Earnings on two shares $1.50 2.50 3.50 Slump Expected Boom Outcome State of the Economy M&M (Debt Policy Doesn’t Matter)