Question
In: Finance
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
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 $22 million in invested capital, has $4.4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 12% interest on its debt, whereas LL has a 35% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure.
- Calculate the return on invested capital (ROIC) for each firm.
Round your answers to two decimal places.
ROIC for firm LL is %
ROIC for firm HL is % - Calculate the rate of return on equity (ROE) for each firm.
Round your answers to two decimal places.
ROE for firm LL is %
ROE for firm HL is % - Observing that HL has a higher ROE, LL's treasurer is thinking
of raising the debt-to-capital ratio from 35% 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.
%
Solutions
jeff jeffy answered 2 years agoRelated Solutions
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
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
$26 million in invested capital, has $5.2 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 55% and pays 13% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 9%
interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
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 $27 million in invested capital, has $4.05
million of EBIT, and is in the 40% federal-plus-state tax bracket.
Firm HL, however, has a debt-to-capital ratio of 60% and pays 11%
interest on its debt, whereas LL has a 35% debt-to-capital ratio
and pays only 9% interest on its debt. Neither firm uses preferred
stock in...
FINANCIAL LEVERAGE EFFECTS: Firms HL and LL are identical except for their financial leverage ratios and...
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 $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 the debt, whereas LL has a 30% debt-to-capital ratio and pays
only 10% interest on its debt. Neither firm uses preferred stock in...
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$24 million in invested capital, has $6 million of EBIT, and is in
the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 11% interest on its debt,
whereas LL has a 20% debt-to-capital ratio and pays only 8%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$12 million in invested capital, has $1.8 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 45% and pays 12% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 8%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$23 million in invested capital, has $4.6 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 55% and pays 13% interest on its debt,
whereas LL has a 35% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$21 million in invested capital, has $4.2 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 11% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 9%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$26 million in invested capital, has $3.9 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 55% and pays 11% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 8%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
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 $2.1 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 45% and pays 11% interest on its debt,
whereas LL has a 35% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
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 $3 million of EBIT, and is in
the 25% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 12% interest on its debt,
whereas LL has a 30% debt-to-capital ratio and pays only 9%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
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