HL | LL | ||||
Total capital | $20m | $20m | |||
Debt | $10 m | $6 m | |||
Equity | $10 m | $14 m | |||
HL | LL | ||||
EBIT | 4,000,000 | 4,000,000 | |||
- | Interest | 1,200,000(@12%) | 600,000(@10%) | ||
EBT | 2,800,000 | 3,400,000 | |||
Tax @ 40% | 1120000 | 1360000 | |||
EAT | 1,680,000 | 2,040,000 | |||
a) | ROIC=EAT/total capital | ||||
HL | LL | ||||
ROIC | 1,680,000/20,000,000 | 2,040,000/20,000,000 | |||
0.084 or 8.4 % | 0.102 or 10.2 % | ||||
b) | ROE | 1,680,000/10,000,000 | 2,040,000/14,000,000 | ||
0.168 or 16.8% | 0.1457 or 14.57% | ||||
c) | LL | ||||
New debt | =20m*60%=$12m | ||||
equity | = 8 millions | ||||
EAT | = | [{4,000,000-(12,000,000*0.15)}*(1-0.4)] | |||
= | $1,320,000 | ||||
New ROE | = | 1,320,000/8,000,000 | |||
= | 0.165 or 16.5 % | ||||
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $19 million in invested capital, has $5.7 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 30% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS 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 55% and pays 12% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in...
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FINANCIAL LEVERAGE EFFECTS 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 50% and pays 11% interest on its debt, whereas LL has a 35% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $12 million in invested capital, has $2.4 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 10% interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS 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 55% and pays 11% 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...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $25 million in invested capital, has $6.25 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 11% interest on its debt, whereas LL has a 40% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $26 million in invested capital, has $3.9 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 25% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...