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3. Problem 13.05 * Click here to read the eBook: Business and Financial Risk FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for
3. Problem 13.05 * Click here to read the eBook: Business and Financial Risk 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 $24 million in invested capital has 4 milion of EBIT, and is in the 40% federal-plus-state tax bracket Firm HL, however, has a debt-to-capital ratio of 5% and pays 11 interest on ta tee, whereas has a 40% debt-to-capital rate and says only 8%, interest onts debt. Neither firmes preferred stock in its capital structure. Calculate the return on invested capital (ROC) for each tim. Round your answers to two decimal places ROIC for firm LL is ROIC for firm HLIS Calculate the rate of return on uity (ROE) for each tom. Round your answers to two decimal places RE for firm LLIS ROE for firm HLI 8 c. Covering that HL has a higher ROL treasurer is thinking of raising the debt to capital from 40% to 6 even though that would increases interest rate on debt to 15% Calculate the new ROE for LL. Round your answer to the decimal places
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