Question: Please do this correctly. Already had 3 questions completely incorrect. If you do not know it, please do not attempt. Thank you in advance! The

Please do this correctly. Already had 3 questions completely incorrect. If you do not know it, please do not attempt.

Thank you in advance!

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $20 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 25%. Neal is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The CFO has estimated next year's EBIT for three possible states of the world: $4 million with a 0.2 probability, $3 million with a 0.5 probability, and $800,000 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.

Debt/Capital ratio is 0.

RE: %
: %
CV:

Debt/Capital ratio is 10%, interest rate is 9%.

RE: %
: %
CV:

Debt/Capital ratio is 50%, interest rate is 11%.

RE: %
: %
CV:

Debt/Capital ratio is 60%, interest rate is 14%.

RE: %
: %
CV:

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!