In: Finance
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 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 = |