FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next ye.docx - FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next year's

FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next ye.docx

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FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40 %. The CFO has estimated next year's EBIT for three possible states of the world: $5.9 million with a 0.2 probability, $1.8 million with a 0.5 probability, and $0.4 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of
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Unformatted text preview: variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0. ROE - % CV- Debt/Capital ratio is 10 % , interest rate is 9%. ROE - % % CV - Debt/Capital ratio is 50 % , interest rate is 11 %. ROE - % ROE % CV= Debt/Capital ratio is 10%, interest rate is 9%. ROE % % CV Debt/Capital ratio is 50%, interest rate is 11% . ROE = CV Debt/Capital ratio is 60%, interest rate is 14 % . ROE CV =...
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  • Spring '17
  • DEBORAHGOLDSMITH

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