So let's demonstrate the impact of leverage on returns.

Firstly, let's consider your whole coffee business completely funded by equity.

There are 10,000 shares, each trading a $40 per share.

So the market capitalization, the market value of your equity is $400,000.

Let's also assume that there are three possible states of

the world that you face.

Let's first take our normal or our expected state of the world.

We expect to generate $100,000 of operating profit.

So our net income before tax is $100,000.

We pay tax at a corporate rate of 30%, leaving net income of $70,000.

So our return on equity in our expected state of the world is 17.5%

Simply, $70,000 divided by $400,000, being the market value of equity.

In the poor state of the world, we generate only $10,000 of operating profit,

implying a return on equity of only 1.75%.

And in the great state of the world, we generate $200,000 of profit,

generating a return on equity of 35%.

Now let's consider the down state of the world,

where operating profit is only $10,000.