Answered step by step
Verified Expert Solution
Question
...
1 Approved Answer
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $17 million in
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $17 million in invested capital, has $2.55 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas LL has a 25% debt-to-capital ratio 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. Round your answers to two decimal places. ROIC for firm LL: % ROIC for firm HL: %
- Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: % ROE for firm HL: %
- Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 25% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places. %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started