Calculate the rate of return on equity for each firm

Assignment Help Financial Management
Reference no: EM131929018

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $15 million in invested capital, has $3.75 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 30% 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 30% 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.

Reference no: EM131929018

Questions Cloud

Find the value of your firm equity using relative valuation : find the value of your firm's equity using a relative valuation. Assume neither firm has a significant amount of cash on hand,
Write an essay about the cultural impact of popular music : Write an essay about the cultural impact of popular music on society, and how it reflects the social issues of its time of production.
Discuss the key changes that have advanced hr : Based on the assigned chapters this week, identify three (3) key changes that have advanced HR and provide a justification to support your selection.
New firm in perfect competition : The market demand and supply curves in a perfectly competitive industry are given by: P = 24 - Q/1,000 and P = -4 + Q/750.
Calculate the rate of return on equity for each firm : Calculate the return on invested capital (ROIC) for each firm. Calculate the rate of return on equity (ROE) for each firm.
Meet the cost-effectiveness criterion : Show that a uniform standard of pollution reduction will not meet the cost-effectiveness criterion
What events issues or themes do talk about in the document : What events, issues or themes do they talk about in this document? What is the main theme that connects these documents, such as freedom, equality or democracy?
Discuss about the standardizing care based on research : What do you see as the conflicts between customizing patient care to the needs of an individual patient and standardizing care based on research?
Calculate the money multiplier : Calculate the money multiplier (mm). What is the money supply (use MS = mm x MB)?

Reviews

Write a Review

Financial Management Questions & Answers

  What is the discounted pay back period for project

Given the following information and assuming straight line depreciation to zero. What is the discounted pay back period for this project? initial investment= 500000; life =5 years; cost savings= 160000 per year; salvage= 30000 in 5 years; tax rate= 3..

  The time value of money impact investment decisions

How does the time value of money impact investment decisions? The future value of an investment depends on what key factors?

  What is the current ratio

A company has total assets of $120,000, current assets of $80,000, total liabilities of $50,000, and current liabilities of $25,000. What is the current ratio?

  The sales forecasts and the abandonment option

A firm is considering a project with a 5-year life and an initial cost of $62,500. The appropriate discount rate for this project is 13%. The firm expects to sell 2,300 units a year for the first 3 years. The cash flow per unit is $10. What is the ne..

  Reduce the amount of time left to pay off your? loan

how much will it reduce the amount of time left to pay off your? loan?

  Prepare a assessment of the companys risk management program

Prepare a critical assessment of the company's risk management program. This assessment should clearly identify the program's strengths and weaknesses.

  The? after-tax cost of the preferred equity

The current market price of the share is $75. Assume that the corporate tax rate is 42?%. The? after-tax cost of the preferred equity is __?%.

  How do these stages impact the path of economic integration

How do these stages impact the path of economic integration??

  What is the tax liability

Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10 year life using the straight line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that..

  Bonds will have the largest percentage increase in its value

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

  What would be the cost of new equity

New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity?

  Company go ahead with the project based on your calculations

Company X wants to acquire another similar company.   It estimates that net cash flows for the acquired company will be $4,500,000 per year for 10 years. The cost is $30,000,000. The company's cost of capital is 10 percent. Calculate NPV, IRR, and MI..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd