Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $15 million in invested capital, has $2.25 million of EBIT, and is in the 25% federal-plus-state tax bracket. Both firms are small with average sales of $25 million or less during the past 3 years, so both are exempt from the interest deduction limitation. Firm HL, however, has a debt-to- capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 25% debt- to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure. a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL: ROIC for firm HL: ROE for firm LL: ROE for firm HL: % b. Calculate the return on equity (ROE) for each firm. Round your answers to two decimal places. % % % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt- to-capital ratio from 25% 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. Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $15 million in invested capital, has $2.25 million of EBIT, and is in the 25% federal-plus-state tax bracket. Both firms are small with average sales of $25 million or less during the past 3 years, so both are exempt from the interest deduction limitation. Firm HL, however, has a debt-to- capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 25% debt- to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure. a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL: ROIC for firm HL: ROE for firm LL: ROE for firm HL: % b. Calculate the return on equity (ROE) for each firm. Round your answers to two decimal places. % % % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt- to-capital ratio from 25% 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.
Expert Answer:
Answer rating: 100% (QA)
To calculate the Return on Invested Capital ROIC and Return on Equity ROE for each firm we can use the following formulas ROIC EBIT 1 Tax Rate Investe... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these finance questions
-
The firms HL and LL are identical except for their debt-to-total-assets ratios and interest rates on debt. Each has $20 million in assets, earned $4 million before interest and taxes, and has a 40...
-
Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $20 million in assets, has $4 million of EBIT, and is in the 40% federal-plus-state...
-
Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt-HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what...
-
In Exercises 7192, find and simplify the difference quotient f(x +h)-f(x) h -, h = 0
-
Derive Equation 39-16a for the frequency received by an observer moving with speed V toward a stationary source of electromagneticwaves. V1-vlc? 1-Vlc 39-16a -fo approaching
-
What kind of taxpayer errors could be solved by mail?
-
Assume the same data as given in problem 9, except the company expects the following production: Case A: 300 bbl per month Case B: 500 bbl per month REQUIRED: a. Determine the number of months needed...
-
Watchdog Company maintains and repairs warning lights, such as those found on radio towers and lighthouses. Watchdog Company prepared the end-of-period spreadsheet shown below at July 31, 2014, the...
-
Prove that the series (1+3i)" zn n= 4" n ln (n) converges for all z such that || 2. Here In: (0, ) R is the natural logarithm.
-
On 1 October 2023 Pumice acquired the following non-current investments: (i) 80% of the equity share capital of Silverton at a cost of 13. 6 million (ii) 50% of Silverton's 10% loan notes at par...
-
some instruments in the takht ensemble perform an ostinato underneath a solo instrument. What is an ostinato? Explain.
-
Evaluate the indefinite integral and determine whether the corresponding improper integral is divergent or convergent. If it is convergent, evaluate it. If it diverges, state your answer as "DIV". z...
-
Encik Jeff, a Canadian citizen, left Malaysia permanently on 3 1 October 2 0 2 2 . The record of Encik Jeff s stays in Malaysia have been as follows: Year 2 0 1 6 , He stay in Malaysia 2 0 December...
-
Nio Inc. (Nio) needs to expand its production capacity. In order to do so, Nio is going to acquire a machine and wants to know whether it should lease or purchase the machine. Nio has a 32% tax rate....
-
Assume thst when preparing a budget you must include 1 . 6 5 % of the base salary plus a fixed cost of $ 6 , 8 3 0 . 0 0 for fringe benefits. What would would be the total salary and benefits on a...
-
Compute the given integral by first identifying the integral as the volume of a solid. 49 - x - y2 dA, where D is the disk x + y < 49.
-
The post-closing trial balance of Wildhorse Corporation at December 31, 2020, contains the following stockholders' equity accounts. Preferred Stock (14,600 shares issued) $730,000 2,430,000 Common...
-
What is the order p of a B + -tree? Describe the structure of both internal and leaf nodes of a B + -tree.
-
Why are High Techs returns expected to move with the economy, whereas Collections are expected to move counter to the economy?
-
Suppose Bon Temps decided to issue preferred stock that would pay an annual dividend of $5 and that the issue price was $50 per share. What would be the stocks expected return? Would the expected...
-
Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous casting process. SSCs founders, Donald Brown and Margo Valencia, had been employed in the research department of a...
-
Modem databases require a high level of skill and knowledge to be adequately supported. See if you can interview the database administrators in three or four local organizations which nse...
-
What is at common misconception about databases?
-
CASE tools, such as system Architect, are used for database development and support. Search on the Web and in trade journals for some of the popular CASE tools currently in use. a. What CASE tools...
Study smarter with the SolutionInn App