FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for t.docx - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their

FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for t.docx

• 3

This preview shows page 1 - 3 out of 3 pages.

FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has \$14 million in invested capital, has \$2.8 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt- to-capital ratio of 50% and pays 11% Interest on its debt, whereas has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure. a. Calculate the return on invested capital

You've reached the end of your free preview.

Want to read all 3 pages?

Unformatted text preview: (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL is ROIC for firm HL IS b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LLIS ROE for firm HL is c. Observing that HL has a higher ROE, LL'S treasurer is thinking of raising the debt-to-capital ratio from 30% 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....
View Full Document

• Spring '17
• DEBORAHGOLDSMITH

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes