Q8

8. Problem 14.05 (Financial Leverage Effects) ebook 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 56 million of EBIT, and it in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 11% interest on its debt, whereas L has a 25% debt-to-capital ratio and pays only interest on its debt. Neither firm uses preferred stock in its capital structure. 3. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places ROIC for firm LL: % ROIC for firm HLI b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places 9 ROE for firm LL ROE for fra H c. Observing that has a higher ROE, Lts treasurer is thinking of raising the debt to capital ratio from 25% to 60% even though that would increase its interest rate on all debt to 15% Calculate the new ROE for LL. Round your answer to two decimal places