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