Year 1: Operating profit margin= 6%, the company's annual turnover is 3 times its invested capital....

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Year 1: Operating profit margin= 6%, the company's annual turnover is 3 times its invested capital. The company uses no debt, tax rate = 30%, risk free rate = 15%, beta = 1, ERP=5% Year 2: Operating profit margin- 12%, the company's annual turnover is 2 times its invested capital. Now debt-equity, interest expense to EBIT is 18%, tax rate = 25%, t-bill rate = 14%, ERP-5% 1) 2) 3) Calculate the ROE ratios for both years. (4 points) Would you give a bonus to the CEO? Why? (4 points) == You expect that borrowing costs will be 25% in year 3. Should you increase/decrease leverage? Explain. (2 points) BE =B1+(1-Tax). [1+a Answer 1: Debt Equity Year 1: Operating profit margin= 6%, the company's annual turnover is 3 times its invested capital. The company uses no debt, tax rate = 30%, risk free rate = 15%, beta = 1, ERP=5% Year 2: Operating profit margin- 12%, the company's annual turnover is 2 times its invested capital. Now debt-equity, interest expense to EBIT is 18%, tax rate = 25%, t-bill rate = 14%, ERP-5% 1) 2) 3) Calculate the ROE ratios for both years. (4 points) Would you give a bonus to the CEO? Why? (4 points) == You expect that borrowing costs will be 25% in year 3. Should you increase/decrease leverage? Explain. (2 points) BE =B1+(1-Tax). [1+a Answer 1: Debt Equity