The Neal Company wants to estimate next years return on equity (ROE) under different leverage ratios. Neals
Question:
The Neal Company wants to estimate next year’s return on equity (ROE) under different leverage ratios. Neal’s total assets are $14 million, it currently uses only common equity, and its federal-plus-state tax rate is 40%. The CFO has estimated next year’s EBIT for three possible states of the world: $4.2 million with a 0.2 probability, $2.8 million with a 0.5 probability, and $700,000 with a 0.3 probability. Calculate Neal’s expected ROE, standard deviation, and coefficient of variation for each of the following debt ratios; then evaluate the results:
Debt Ratio Interest Rate 0% 10 9% 50 11 60 14
Step by Step Answer:
No leverage Debt 0 Equity 14000000 State P s EBIT EBIT r d D1 T ROE S P S ROE P S ROE S RE 2 1 02 42...View the full answer
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Related Video
The Dupont analysis is an expanded return on equity formula, calculated by multiplying the net profit margin by the asset turnover by the equity multiplier. The DuPont analysis is also known as the DuPont identity or DuPont model.This Video will guide on how to calculate return on Equity and estimate profitability of shareholders using DuPont Analysis.
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