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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 $20 million in invested capital, has $5 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 40% 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 40% 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. %
Calculate the total interest and fees you will pay on this loan commitment.
Liquidity and Asset Management Ratios Oasis Products, Inc. has current liabilities = $11.3 million, current ratio = 1.80 times, inventory turnover ratio = 12.3 times, average collection period = 23 days, and sales = $115 million. What is the value of..
An all-equity-financed firm plans to grow at an annual rate of at least 17%.
If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and..
Maria Sanchez needs $9540 in three years to put a new roof on our house. To meet this goal she deposit money into an account today that pays 4.75% compounded monthly. Find the amount she must invest today to have $9540 in three years?
After the stock market crash in 1987, the smile in implied volatility curve becomes a smirk (asymmetric curve shape)
Suppose that you have been placed in charge of calculating the user cost of capital for a corporation. You know that capital costs are debt-financed at the margin and you have the following additional information. In the absence of taxes, what is the..
If the constant growth ("Gordon" or "Constant Growth Dividend Discount") model is to give a reasonablea valuation of a stock, which of the following is not a valid assumption for the model?
County Credit Union (CCU) has $1 million in new funds that must be allocated to home loans, personal loans, and automobile loans. The annual rates of return for the three types of loans are 7% for home loans, 12% for personal loans, and 9% for automo..
Determine the distribution (dollar amount and percentage) of the liquidation proceeds among the various creditors of Go-for-Broke.
Without a financial plan it is difficult to choose the investments that will provide sufficient value at the correct time. Immediate annuity contracts will only pay the annuitant. There are no exceptions. This means that upon the annuitant’s death th..
what effect would you expect this new Leverage policy will have on Andrews ROE?
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