Calculate the return on invested capital for each firm

Assignment Help Financial Management
Reference no: EM131487571

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 $21 million in invested capital, has $3.15 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 13% interest on its debt, whereas LL has a 20% 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 20% 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: EM131487571

Questions Cloud

Find present value of the perpetuity : Assuming an annual effective interest rate of 5%, find the present value of the perpetuity.
Organization save each month by refinancing : How many years will it take the organization to recover the up-front fees? how much will the organization save each month by refinancing?
Jack oyster barn shows you financial statements : jack's oyster barn Shows you financial statements that reflect 1 million of total assets and 100,000 of liabilities and 500,000 in equity. You conclude..
Define three tax issue : estimation of the cost of the advertisement and marketing for the aforementioned period and then submit the estimates to HP.
Calculate the return on invested capital for each firm : Firms HL and LL are identical except for their financial leverage ratios and interest rates they pay on debt. Calculate return on invested capital each firm.
Call option-the stock should be worth what today : A call option on Juniper Corp. stock with exercise price of $30 and expiration date one year from now is worth $8.50 today.The stock should be worth what today.
Pinnacle deduct from its corporate taxable income : How much of the luxury skybox season ticket cost may Pinnacle deduct from its corporate taxable income?
Calculate the annual cash flows for each of investments : Calculate the annual cash flows for each of the following investments: $234,000 invested at 6 percent.
Seven-year loan-how much will each payment be : The Elkridge Bar & Grill has a seven-year loan of $25,300 with Bank of America. how much will each payment be?

Reviews

Write a Review

Financial Management Questions & Answers

  Futures contract buyer versus a buyer of call option

Compare and contrast the commitments taken on by a futures contract seller versus a buyer of a put option. Compare and contrast the commitments taken on by a futures contract buyer versus a buyer of a call option.

  Find the real rate of return on the investment

Find the real rate of return on the investment using the exact method: A bank account that yields a nominal annual rate of 1.6%, if a market basket of consumer items rises in price from $800 to $825.

  Cost of common equity and wacc

Patton Paints Corporation has a target capital structure of 25% debt and 75% common equity, with no preferred stock. It’s before-tax cost of debt is 8% and its marginal tax rate is 40%. The current stock price is P0 = $22.50.

  Concerning use of funded irrevocable life insurance trust

All the following statements concerning the use of a funded irrevocable life insurance trust are correct EXCEPT:

  Rates expected to remain at current levels on into future

McCue Inc.'s bonds currently sell for $1,200. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and r..

  How many polish zlotys are equal to a pound

Suppose a Polish zloty is selling for $0.3414 and a British pound is selling for 1.4973. What is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a pound?

  What is discount rate must the market

A $100 face value preferred share (with no special features) with a stated 4% dividend is observed trading in the market at $103.24. What is discount rate must the market be using to value this share?

  What rate should firm use to discount projects cash lows

Titan Mining Corporation has 9.3 million shares of common stock outstanding, 370,000 shares of 6 percent preferred stock outstanding, and 195,000 8.1 percent semiannual bonds outstanding, par value $1,000 each. what rate should the firm use to discou..

  What is counts unlevered beta

Counts Accounting has a beta of 1.40. The tax rate is 35%, and Counts is financed with 35% debt. What is Counts' unlevered beta?

  Describe the strategies to deal with the management

Describe the setting and access to potential subjects. If there is a need for a consent or approval form, then one must be created. Describe the strategies to deal with the management of any barriers, facilitators, and challenges.

  The nominal return on your investment

You want to have $3 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10 percent and the inflation rate is 4 percent. What real amount must you deposit each year to achieve your goal?

  What is the present value of your winnings

You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $600,000 per year. Thus, in one year, you receive $1.6 million. In two years you get $2.2 million, and so on. If the appropriate interest..

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