Question

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $11 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: $4.6 million with a 0.2 probability, $3.3 million with a 0.5 probability, and $0.4 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 -to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places. Debt/Capital ratio is 0. RÔE: 14.67 % 8.61 % 0.59 CV: Debt/Capital ratio is 10%, interest rate is 9%. RÔE: 0 CV: 9 15.92 % .13 % 0.57 Debt/Capital ratio is 50%, interest rate is 11%. RÕE: o: CV: 22.75 % 17.21 % 0.76 Debt/Capital ratio is 60%, interest rate is 14%. ROE: 0: CV: 24.08 % 21.51 % 0.89

I would like to double check my answers. Please make sure to carry all decimal places and not to round intermediate calculations.

Thank you!

Answer 1

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