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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 $26 million in invested capital, has $3.9 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 11% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% 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 25% 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. ___ %.
A newly issued bond has a maturity of 3 years and pays a 7% coupon rate (with coupon payments coming semiannually). The bond sells at par value. What is the modified duration of the bond? Find the actual price of the bond assuming that its yield to m..
A project has a first cost of $120,000 and an estimated salvage value after 25 years of $20,000. Estimated average annual receipts are $25,900; estimated average annual disbursement are $15,060. Assuming that annual receipts and disbursements will be..
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A project has an initial cost of $8,700 and produces cash inflows of $2,600, $5,000, and $1,600 over the next three years, respectively. What is the discounted payback period if the required rate of return is 7 percent?
An entrepreneur has 1000 shares of the venture. An early investor invested $10,000 for 2000 shares that included a full ratchet provision (5 per share ) now in a subsequent round, an investor is wiling to invest $8,000 for a 40% share of the ending e..
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What are the standard deviations of the associated forecast errors? Also compute the lag-1 and lag-2 autocorrelations of the return series.
The Rapid Growth Company is expected to pay a dividend of $1.00 at the end of this year. how much would you justified in paying for this stock?
How much must be invested annually if the expected yield is only 5 percent?
Discuss three verbal communication elements and three nonverbal communication elements
Al Thomas has recently been approached by his brother-in-law, Robert Watson, with a proposal to buy a 20 percent interest in Watson Leisure Time Sporting Goods. The company manufactures golf clubs, baseball bats, basketball goals, and other similar i..
Tom and Debbie are starting to take their retirement planning seriously. They are both 46 and plan to retire in 20 years at the age of 66.
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