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 $11 million in invested capital, has $1.65 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 55% and pays 12% Interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 8% 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: % % b. Calculate the return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: ROE for firm HL: 96 % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% 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 $11 million in invested capital, has $1.65 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 55% and pays 12% Interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 8% 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: % % b. Calculate the return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: ROE for firm HL: 96 % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% 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)
Financial Ratio Analysis for Firms HL and LL a Return on Invested Capital ROIC Calculate EBT Earning... View the full answer
Related Book For
Fundamentals Of Financial Management
ISBN: 9780357517574
16th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these finance questions
-
An isolated conductor of arbitrary shape has a net charge of +9.00x106 C. Inside the conductor is a cavity within which is a point charge q +3.15x106 C. = What is the charge on the cavity wall?...
-
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 $4 million of EBIT, and is in the 25%...
-
The dehydration butanol of alumina is carried out over a silica-alumina catalyst at 680K. CH3CH2CH2CH20H------->cat CH3CH=CHCH3 + H2O The rate law is -r Bu = KPBU/(1+KBuPBul with k= 0.054...
-
Five core customer and marketplace concepts are critical to success: (1) Needs, wants, and demands; (2) Marketing offers (products, services, and experiences); (3) Value and satisfaction; (4)...
-
Analyze the effects on a large open economy of a temporary adverse supply shock that hits only the foreign economy. Discuss the impact on the home country's national saving, investment, and current...
-
What are some common reasons for resistance to control?
-
Mary Pierce is the controller of Arnold Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year. (a) On December...
-
https://dspace.mit.edu/bitstream/handle/1721.1/67363/Roy_Fast%20Transcription.pdf?sequence=1&isAllowed=y Summarize the article and get the concept purpose, objective, data and results.
-
You have been hired as a new accountant for Bake-Me-Some-Bread, Inc. They have asked you to calculate the company's Manufacturing Overhead Rate. You are given the following data from the accounting...
-
Explain how each of the toxic leadership behaviors; bullying, narcissism, and micromanaging could have ethical consequences for leadership effectiveness, including two specific examples of a...
-
What kind of association table should be used to represent an association with an association class that is marked with {bag} on one side?
-
Overconfidence bias will lead to wrong decisions. True False
-
___________ can be defined as a process by which individuals select, organize, and interpret their sensory impressions, so as to give meaning to their environment. Attitude Learning Behavior ...
-
Which factors affect individual performance?
-
Provide a definition for boot.
-
This question concerns Pikettys Second Fundamental Law of Capitalism: = s/g, or the ratio of capital to national income equals the saving rate out of national income divided by the growth rate of...
-
In each of the following independent cases, document the system using whatever technique(s) your instructor specifies. a. Dreambox Creations (www.dreamboxcreations.com/) in Diamond Bar, California,...
-
What is a multinational corporation?
-
Suppose you were a member of Company Xs board of directors and chairperson of the companys compensation committee. What factors should your committee consider when setting the CEOs compensation?...
-
Complete the balance sheet and sales information using the following financial data: Total assets turnover: 1.5 Days sales outstanding: 36.5 daysa Inventory turnover ratio : 5 Fixed assets turnover:...
-
Define torsional section modulus.
-
An inverted \(T\)-beam of \(4 \mathrm{~m}\) span is simply supported at the ends. Its cross-section is 300 \(\mathrm{mm} \times 250 \mathrm{~mm} \times 10 \mathrm{~mm}\). If permissible stresses in...
-
A rolled steel joist \(400 \mathrm{~mm} \times 200 \mathrm{~mm} \times 20 \mathrm{~mm}\) is freely supported on a span of \(4 \mathrm{~m}\). The flanges are strengthened by two \(250 \mathrm{~mm}...
Study smarter with the SolutionInn App