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 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 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 for each firmB. Calculate the return on equity for each firm
C. Observing that HL has a higher ROE, LL’s treasurer is thinking of raising the deb-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.

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Status NEW Posted 03 Aug 2017 05:08 PM My Price 7.00

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