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In: Finance
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
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 million with a 0.2 probability, $2 million with a 0.5 probability, and $0.9 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 = |
Solutions
Expert Solution
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -
jeff jeffy answered 1 year agoRelated Solutions
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
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has no future plans to use preferred stock in its capital
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(ROE) under different financial leverage ratios. Neal's total
capital is $14 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
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The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
The Neal Company wants to estimate next year's return on equity
(ROE) under different financial leverage ratios. Neal's total
capital is $14 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:
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probability, and $0.3 million with a...
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
The Neal Company wants to estimate next year's return on equity
(ROE) under different financial leverage ratios. Neal's total
capital is $17 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 25%. The CFO has
estimated next year's EBIT for three possible states of the world:
$5.5 million with a 0.2 probability, $2.4 million with a 0.5
probability, and $500,000 with a 0.3...
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
The Neal Company wants to estimate next year's return on equity
(ROE) under different financial leverage ratios. Neal's total
capital is $16 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 25%. The CFO has
estimated next year's EBIT for three possible states of the world:
$5.2 million with a 0.2 probability, $2 million with a 0.5
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The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
The Neal Company wants to estimate next year's return on equity
(ROE) under different financial leverage ratios. Neal's total
capital is $11 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:
$5.5 million with a 0.2 probability, $2.2 million with a 0.5
probability, and $0.6 million with a...
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
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(ROE) under different financial leverage ratios. Neal's total
capital is $15 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:
$5.4 million with a 0.2 probability, $3.1 million with a 0.5
probability, and $0.3 million with a...
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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:
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probability, and $0.4 million with a...
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage...
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:
$5.1 million with a 0.2 probability, $3.3 million with a 0.5
probability, and $0.5 million with a...
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