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 $5.75 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure.
Particulars | HL ($ in millions) | LL ($ in millions) | Revised LL |
Invested Capital | $23.00 | $23.00 | $23.00 |
Debt to Capital | 60% | 25% | 60.00% |
Debt (Capital x Debt to Capital Ratio) | $13.80 | $5.75 | $13.80 |
Equity (Capital - Debt) | $9.20 | $17.25 | $9.20 |
EBIT | $5.75 | $5.75 | $5.75 |
Less: Interest | $1.66 | $0.46 | $2.07 |
(13.80 x 12%) | (5.75 x 8%) | (5.75x15%) | |
EBT | $4.09 | $5.29 | $3.68 |
Less: Tax @40% | $1.64 | $2.12 | $1.47 |
EAT | $2.46 | $3.17 | $2.21 |
Add : Interest | $1.66 | $0.46 | $2.07 |
Earning after tax before interest | $4.11 | $3.63 | $4.28 |
Return on Invested Capital | 17.88% | 15.80% | 18.60% |
(EAT before Interest/Invested Capital) | (4.11/23) | (3.63/23) | (4.28/23) |
Return on Equity | 26.70% | 18.40% | 24.00% |
(EAT/Equity) | (2.46/9.20) | (3.17/17.25) | (2.21/9.20) |
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
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 $5.75 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
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 60% 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....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $10 million in invested capital, has $2 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $10 million in invested capital, has $1.5 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 13% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $17 million in invested capital, has $4.25 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 13% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $13 million in invested capital, has $1.95 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 13% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
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 $3 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 13% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
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 55% and pays 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
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. 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 9% interest on its debt. Neither firm uses preferred stock in its capital structure....