$14-5$ FINANCIAL LEVERAGE EFFECTS 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 and pays only $10\%$ interest on its debt. Neither firm uses preferred stock in its capital structure.

Calculate the return on invested capital $($ROIC$)$ for each firm.

Calculate the return on equity $($ROE$)$ for each firm.

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$.$