The Neal Company wishes to calculate next year's return on equity under different leverage ratios. Neal's total assets are $14 million, and its federal-plus-state tax rate is 40 percent. The company is able to estimate next year's earnings before interest and taxes for three possible states of the world: $4.2 million with a 0.2 probability, $2.8 million with a 0.5 probability, and $700,000 with a 0.3 probability. Calculate Neal's expected return on equity.
LEVERAGE
(DEBT/TOTAL ASSETS) INTEREST RATE
0% ......................................... -
10 .......................................... 9%
50 .......................................... 11
60 .......................................... 14