Based on brigham houstons definition of optimal

 Based on Brigham & Houston’s definition of “optimal capital structure” mentioned above
13-5/ 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 50% and pays 12% interest on its debt, whereas LL has a 30% debt-to-
capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its
capital structure.
a. Calculate the return on invested capital (ROIC) for each firm. (p. 487)
b. Calculate the return on equity (ROE) for each firm. (p. 487)

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. (p. 487)
Reference:
Brigham, E. F., & Houston, J. F. (2017). Fundamentals of Financial Management (Concise 9th
ed.). : Cengage Learning.