The Neal Company wants to estimate next year's return on equity (ROE) under different leverage ratios. Neal's
Question:
The Neal Company wants to estimate next year's return on equity (ROE) under different leverage ratios. Neal's total capital is $17 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.9 million with a 0.2 probability, $3.1 million with a 0.5 probability, and $500,000 with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
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Fundamentals of Financial Management
ISBN: 978-0324272055
10th edition
Authors: Eugene F. Brigham, Joel F. Houston