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FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital, has $4.05 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 35% debt-to-capital ratio and pays only 9% 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 35% 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. %
We have the Goncalves par bond paying a coupon rate of 8% and having a maturity of 20 years. If the coupon rate of Goncalves were to alter to 4%, what would the new duration be? What is the meaning of duration? Under what circumstances would duration..
Calculate the return on your investment in percent.
Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 9% pe..
Goodweek Tire Inc has recently developed a new tire. the Super Tread, and must decide whether to make the investment. The research and development costs so far total $10 million. Market research (costing $5 million) shows that there is significant de..
What are the three lines of defense in effective risk management and how do we distinguish among their functions?
What is the value of the investment at the current interest rate of 11.5 percent?
The identification of a company’s risk profile and the analysis of what risks should be avoided.
A U.S. company is considering a project in Mexico. Estimated cash flows are 10 million Mexican pesos the first year and 20 million Mexican pesos the second year. The U.S. Company would incur a cost of $2 million at the start of the project, and its c..
The real risk-free rate is 3.5%, and inflation is expected to be 2.75% for the next 2 years. What is the maturity risk premium for the 2-year security?
You now have $9101. At what annual interest rate would you have to invest this money so you can double it in 8 years? Assume annual compounding.
Calisto Launch Services is an independent space corporation and has been contracted to develop and launch one of two different satellites.
what is the present value cost of this scholarship to the school.
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