Question

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 25%. The CFC has estimated next year's EBIT for three possible states of the world: $5.3 million with a 0.2 probability, $3.5 million with a 0.5 probability, and $700,000 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. Debt/Capital ratio is 0. RÔE: o: 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: Debt/Capital ratio is 60%, interest rate is 14%. RÔE: cv:

Answer 1

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