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The Neal company wants to estimate next year's (ROE) under different financial leverage ratios. Neal's total...

The Neal company wants to estimate next year's (ROE) under different financial leverage ratios. Neal's total capital is $14million, 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 years EBIT for three possible states of the world: $4.2 million with a 0.2 probability, $2.8 million with a 0.5 probability, and $700,000 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; then evaluate the results:

Debt/capital ratio- interest rate

0%- ----------
10- 9%
50- 11
60- 14

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