Firms HD and LD each have $30m in invested capital, $8m of EBIT, and a tax rate of 25%. Firm HD has a D/E ratio of 50% with an interest rate of 8% on its debt. Firm LD has a debt-to-capital ratio of 30%, however, pays 9% interest on its debt. Calculate the following:

a. Return on invested capital for each firm

b. Return on equity for each firm

c. If HD’s CFO is thinking of lowering the D/E from 50% to 40%, which will lower their interest rate further from 8% to 7%, calculate the new ROE for HD.

Answer rating: 100% (QA)

a Return on Invested Capital for each firm Firm HD ROIC EBIT ... View the full answer