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Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $33 million in
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $33 million in invested capital, has $7 million of EBIT, and is in the 30% 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 55% and pays 13.22% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 7.5% interest on its debt. Neither firm uses preferred stock in its capital structure. a. What is the return on invested capital (ROIC) for firm HL? b. What is the return on invested capital (ROIC) for firm LL? c. What is the return on equity (ROE) for firm HL? d. What is the return on equity (ROE) for firm LL? Worth 10 points total
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