The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $10 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5 million with a 0.2 probability, $1.5 million with a 0.5 probability, and $0.7 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0. RÔE = 0 = CV = Debt/Capital ratio is 10%, interest rate is 9%. % % RÔE = 0 = CV = Debt/Capital ratio is 50%, interest rate is 11%. RÔE = 0 = CV = % % ROE= 0 = CV = Debt/Capital ratio is 60%, interest rate is 14%. % % % %

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $10 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5 million with a 0.2 probability, $1.5 million with a 0.5 probability, and $0.7 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0. RÔE = 0 = CV = Debt/Capital ratio is 10%, interest rate is 9%. % % RÔE = 0 = CV = Debt/Capital ratio is 50%, interest rate is 11%. RÔE = 0 = CV = % % ROE= 0 = CV = Debt/Capital ratio is 60%, interest rate is 14%. % % % %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

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The Neal Company wants to estimate next year’s returnon equity (ROE) under different financial leverage ratios. Neal’s total capital is $14 million,it currently uses only common equity, it has no future plans to use preferred stock in itscapital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated nextyear’s EBIT for three possible states of the world: $4.2 million with a 0.2 probability,$2.8 million with a 0.5 probability, and $700,000 with a 0.3 probability. Calculate Neal’sexpected ROE, standard deviation, and coefficient of variation for each of the followingdebt-to-capital ratios; then evaluate the results:
The CFO of Ink Imagination (II) wants to calculate next year's EPS using different leverage ratios. II's total assets are $5 million, and its marginal tax rate is 40 percent. The company has estimated next year's EBIT for three possible economic states: $1.2 million with a 0.2 probability, $800,000 with a 0.5 probability, and $500,000 with a 0.3 probability. (1) Calculate II's expected EPS, standard deviation, and coefficient of variation for each of the following capital structure. (2) What capital structure should the firm choose to lower the firm's risk? Leverage (Debt/Assets) 20% Shares of Stock Outstanding 300,000 200,000 Interest Rate 6% 50 10
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.2 million with a 0.2 probability, $2.7 million with a 0.5 probability, and $0.8 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0. RÔE = %σ = %CV = Debt/Capital ratio is 10%, interest rate is 9%. RÔE = %σ = %CV = Debt/Capital ratio is 50%, interest rate is 11%. RÔE = %σ = %CV = Debt/Capital ratio is 60%, interest rate is 14%. RÔE = %σ = %CV =
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