1 answer

Firms HL and LL are identical except for their financial leverage ratios and the interest rates...

Question:

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure.

  1. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.

    ROIC for firm LL is   %
    ROIC for firm HL is   %
  2. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.

    ROE for firm LL is    %
    ROE for firm HL is    %
  3. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 25% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places.

    %

Answers

a.ROIC = EBIT(1-T)/Capital

LL = 4 million(1-40%)/20 million = 12%

HL = 4 million(1-40%)/20 million = 12%

b.Return on Equity = Income for Equity/Equity Funds

LL = (4 million – 0.45)(1-40%)/15

= 14.2%

HL = (4 –1.44)(1-40%)/8

= 19.2%

c.ROE = (4 – 1.8)(1-40%)/8

= 16.5%

.

Similar Solved Questions

1 answer
What is #intr(lnr)^2dr#?
Should you use u-substitution and then integration by parts? This method isn't working for me....
1 answer
Which scenario is NOT random error? One weight value differs considerably from the others due to...
Which scenario is NOT random error? One weight value differs considerably from the others due to the experimenter forgot to zero the scale o Θ Electronic noise in the circuit of an electrical instrument O Irregular changes in the heat loss rate from a solar collector due to changes in the wind...
1 answer
When the nuclide strontium-80 decays by electron capture: The name of the product nuclide is[ The...
When the nuclide strontium-80 decays by electron capture: The name of the product nuclide is[ The symbol for the product nuclide is Submit Answer Retry Entire Group 8 more group attempts remaining...
1 answer
Three charges that have the same magnitude but may have different signs. In all cases thé...
three charges that have the same magnitude but may have different signs. In all cases thé dis The drawings show charges is Iql- 2.3 C, and the distance between them is d 2.8 mm. Determine the magnitude of the net force charges is lal- 2.3 uC, and the distance between th (b) F- 0 (c) F-...
1 answer
Draw the product И ОН NaBH4 оо
draw the product И ОН NaBH4 оо...
1 answer
System A consists of two spin-1/2 particles, and has a four-dimensional Hilbert space. 1. Write down...
System A consists of two spin-1/2 particles, and has a four-dimensional Hilbert space. 1. Write down a basis for the Hilbert space of two spin-1/2 particles. 2. Calculate the matrix of the angular momentum operator, Sfot = (ŜA, ŠA, ŜA) for system A, in the basis of question 4A.1, an...
1 answer
Your progress has been saved Question 1 of 3 Which of the following options might cause...
Your progress has been saved Question 1 of 3 Which of the following options might cause bias? O using people but not other creatures in the sample O using creatures but not people in the sample using a proportional amount of people and other creatures in the sample using people and other creatures f...
1 answer
Part A Draw the product that is formed when the compound shown below is treated with...
Part A Draw the product that is formed when the compound shown below is treated with an excess of hydrogen gas and a platinum catalyst. Interactive 3D display mode H₃C 1 HC...
1 answer
5. A null and alternative hypothesis are given. Determine whether the hypothesis test is left-tailed, right-tailed,...
5. A null and alternative hypothesis are given. Determine whether the hypothesis test is left-tailed, right-tailed, or two-tailed. HO: u>= 21 Ha: u<21...
1 answer
Under IFRS,the name of statement of owner’s equity is changed to: Select one: a. statement of...
Under IFRS,the name of statement of owner’s equity is changed to: Select one: a. statement of changes in equity b. statement of financial position c. statement of proprietor’s equity d. statement of equity...
1 answer
How do you get these two equations into one equation?
Find an exponential function that passes through each pair of points. Write your answer like y=a(b)^x The ordered pairs are: (1,7.5) and (3,16.875) What are the equations to both of them? I want to know if I did it right....
1 answer
13, A Gallup Youth Survey found that 54% of 502 randomly selected teenagers in the U.S....
13, A Gallup Youth Survey found that 54% of 502 randomly selected teenagers in the U.S. said they got along very well with their parents. What is the number of teenagers in the sample who said that they get along very well with their parents? (4 points) a. b. Construct a 90% confidence interval to e...
1 answer
Peristaltic pumps deliver highly viscous fluids to networks of pipes/tubes. Solve the system given the set...
Peristaltic pumps deliver highly viscous fluids to networks of pipes/tubes. Solve the system given the set of linear equations using the matrix solver in MATLAB, GaussNaive and GaussPivot. Assume the following pipe sections all have the same diameter and lengths. Q1 = 5. Q3 + 2Q4 – 2Q2 = 0 Q3 ...
1 answer
Draw the coupling product of the Pd(0)-catalyzed Suzuki reaction between the following compounds. Show the stereochemistry...
Draw the coupling product of the Pd(0)-catalyzed Suzuki reaction between the following compounds. Show the stereochemistry of the product. Show he stareog ermistry of the prooicaon between the folowing compounds. Draw the coupling product of the Pd(O)-catalyzed Suzuki reaction between the following...
1 answer
Fatty acid metabolism disorder is an autosomal recessive disorder. Two unaffected parents have 6 children –...
Fatty acid metabolism disorder is an autosomal recessive disorder. Two unaffected parents have 6 children – all of whom are unaffected. List all of the father’s possible phenotypes....
1 answer
11. Name an organism that fits the pattern of growth and biochemical characteristics observed in you...
11. Name an organism that fits the pattern of growth and biochemical characteristics observed in you unknown: 12. What disease might this organism cause? 13. How could the disease be treated? 14. What other test could you do to confirm the identity of your unknown? 15. What result would you expect f...
1 answer
2.42 Scooping ice cream. Ice cream usually comes in 1.5 quart boxes (48 fluid ounces), and...
2.42 Scooping ice cream. Ice cream usually comes in 1.5 quart boxes (48 fluid ounces), and ice cream scoops hold about 2 ounces. However, there is some variability in the amount of ice cream in a box as well as the amount of ice cream scooped out. We represent the amount of ice cream in the box as X...