Problem #1 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% 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 30% 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. b. Calculate the return on equity (ROE) for each firm. c. Observing that HL has a higher ROE, LLs treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LLs interest rate on all debt to 15%.Calculate the new ROE for LL Problem #2 Tartan Industries currently has total capital equal to $4 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 3% per year, 200,000 shares of stock are outstanding, and the current WACC is 12.30%. The company is considering a recapitalization where it will issue $2 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax cost of debt will be 10% and its cost of equity will rise to 15.5%. a. What is the stocks current price per share (before the recapitalization)? b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price calculated in part a.