Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $11 million in invested capital, has $2.2 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 40% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure. 1. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL is % ROIC for firm HL is % 2. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL is % ROE for firm HL is % 3. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 40% 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. %

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $11 million in invested capital, has $2.2 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 40% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure. 1. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL is % ROIC for firm HL is % 2. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL is % ROE for firm HL is % 3. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 40% 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. %

Name: Jm. 160. Firms HL and LL are identical except for their financial leve
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Description: Jm. 160. Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $11 million ininvested capital, has $2.2 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, h

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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 $29 million in invested capital, has $7.25 million of EBIT, and is 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 LL has a 35% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure. a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL is ROIC for firm HL is b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. % % ROE for firm LL is ROE for firm HL is % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 35% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your…
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $26 million in invested capital, has $3.9 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% 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…
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 25% 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 50% and pays 12% interest on its debt, whereas LL has 30% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure. A) Calculate the return on invested capital (ROIC) for each firm. B) Calculate the return on equity (ROE) for each firm. C) Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL.
Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/Tas) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40% marginal tax rate. Firm AB has a D/TA ratio of 40% and pays 7.5% interest on its debt, whereas YZ has a 60% D/TA ratio and pays 10% interest on debt. Each firm has 5,000 shares of common stock outstanding. Calculate each firm's EPS and Return on Equity.
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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 $15 million in invested capital, has $2.25 million of EBIT, and is in the 25% 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 60% and pays 11% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure. a. 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: ROE for firm LL: ROE for firm HL: 12 26.79 12 b. Calculate the return on equity (ROE) for each firm. Round your answers to two decimal places. % % % 15.79 * % 21.43 c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the…
Companies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What value would MM now estimate for each firm? Company U:Company L:
Firm AB and Firm YZ are identical except for their debt-to-total-assets rations (D/TAs) and interest rates on debt. Each has $250,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm AB has a D/TA ratio of 40 percent and pays 7.5 percent interest on its debt, whereas YZ has a 60 percent D/TA ratio and pays 10 percent interest on debt. Each firm has 5,000 shares of common stock outstanding. Calclulate each firm's EPS and ROE (ROE = Net income/Equity).
Se Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $23 million in invested capital, has $3.45 million of EBIT, and is in the 25% 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 60% and pays 11% interest on its debt, whereas LL has a 25% debt-to- capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure. a. 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: b. Calculate the return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: ROE for firm HL: % % % % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital…
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $23 million in invested capital, has $3.45 million of EBIT, and is in the 25% 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 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 9% 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 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…
Companies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What is rs for Firm U?
Companies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What is the WACC for Firm U? % What is the WACC for Firm L? %

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