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

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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
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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....
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  • Spring '17
  • DEBORAHGOLDSMITH

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