Calculate the return on invested capital for each firm

Assignment Help Financial Management

Reference no: EM13806653

Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $15 million in invested capital, has $2.25 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 40% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure.

Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.

ROIC for firm LL is %

ROIC for firm HL is %

Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.

ROE for firm LL is %

ROE for firm HL is %

Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 40% to 60%, even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places.

Reference no: EM13806653

Questions Cloud

Retirement plan-what is rate of return on total invested : A publicly traded consulting engineering firm has a retirement plan wherein the company will match an employee’s stock purchases up to $ 5,000 per year, provided the employee has been with the firm for at least 10 years. If an employee hired 10 years..

Saving for retirement : A smart engineer started saving for her retirement 10 years ago. She saved $12,000 each year through the present time. If she has invested in a stock fund that averaged a 15% rate of return over that period, and she expects to make the same annual in..

Should wolfson lease machine or buy it with bank financing : Wolfson Corporation has decided to purchase a new machine that costs $3.2 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 35 percent. Should Wolfson lease the machine..

Real rate of interest on short-term treasury bills : You observe that the current interest rate on short-term U.S. Treasury bills is 4.23 percent. You also read in the newspaper that the GDP deflator, which is a common macroeconomic indicator used by market analysts to gauge the inflation rate, current..

Calculate the return on invested capital for each firm : Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $15 million in invested capital, has $2.25 million of EBIT, and is in the 40% federal-plus-state tax bracket. Calculate the rate of retur..

What is the bond equivalent yield : A U.S. Treasury bill with 89 days to maturity is quoted at a discount yield of 4.17 percent. What is the bond equivalent yield?

Maximum initial cost the company would be willing to pay : Och, Inc., is considering a project that will result in initial after tax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of..

Yield to maturity-value of bond : A $1,000 par value 10-year bond with a 10 percent coupon rate recently sold for $900. The yield to maturity is:

What is the cost of preferred stock-risk-free rate : The 8.50 percent preferred stock of Ajax Unlimited is selling for $92.30 a share. What is the cost of preferred stock if the risk-free rate is 3.95 percent?

User Account

All Pages