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Firms $1L and LL are identical exceot for their financial leverage rotios and the interest rates they pay on debt. Each has $18 million in
Firms $1L and LL are identical exceot for their financial leverage rotios and the interest rates they pay on debt. Each has $18 million in invested capital, has $2.7 millien of E8IT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-tapital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt-to-capitai ratlo and pays only 10% interest on its debk. Neither firm uses preferred stock in its capital structure. a. Calculate the return on livested capital (riolC) for each firm. Pound your answers to two decimal places: ROIC far firm ULt ROIC for firm HE: b. Caiculate the rate of return on equity (RDE) for each fem. Round your ansners to two deomal places: ROC for frm LL: ROE for frim Het C. Ooserving that HL has a higher ROE, LL's treasurer is thinking of raking the debsto-capital rate fram 30% to 60% even though that would increase lL's interest rate on ail debe to 35%. Calcatate the new Roe for U. flound your answer to two decimal places
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