Use the capital structure and leverage Excel file similar to the format shown below:

Assume the following:

Total Capital = 10,000,000

Tax Rate = 40%

There is a 30% chance EBIT =2,000,000

There is a 40% chance EBIT = 1,500,000

There is a 30% chance EBIT = 1,000,000

When Debt/Total Capital = 0%, the interest rate is 0%

When Debt/Total Capital = 20%, the interest rate is 8%

When Debt/Total Capital = 40%, the interest rate is 10%

When Debt/Total Capital = 60%, the interest rate is 12%

1. Which Debt/Total Capital produces the highest E(ROE)?

2. What is that E(ROE)?

Total Capital Debt to Capital Debt Equity $10,000,000.00 10% $0.00 $10,000,000.00 Probabiity ROE 30.00% 12.00% 40.00% 9.00% 30.00% 09. Scenario Interest Rate 10.00% Tax Rate 140.00% Scenario 2 Scenario 3 Expected Return Standard Deviatiorn CV 9.00% 2.32% 0.26 Scenario1 $2,000,000.00 $1,500,000.00 $1,000,000.00 0.00 $2,000,000.00 $1,500,000.00 $1,000,000.00 $800,000.00 600,000.00 S400,000.00 $1,200,000.00 $900,000.00 $600,000.00 EBIT 0.00 0.00 EBT NI ROE 12.00% 9.00% 6.00%