FINANCIAL LEVERAGE EFFECTS - Hello! This is all one question, thank you very much in advance!...

FINANCIAL LEVERAGE EFFECTS - Hello! This is all one question, thank you very much in advance! Will thumbs up for answer! :D

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $13 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: $4.1 million with a 0.2 probability, $2.9 million with a 0.5 probability, and $0.3 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of 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.

RÔE =	%
σ =	%
CV =

Debt/Capital ratio is 10%, interest rate is 9%.

RÔE =	%
σ =	%
CV =

Debt/Capital ratio is 50%, interest rate is 11%.

RÔE =	%
σ =	%
CV =

Debt/Capital ratio is 60%, interest rate is 14%.

RÔE =	%
σ =	%
CV =

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 7 months ago

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