Calculate neals expected roe amd standard deviation

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Reference no: EM131197446

FINANCIAL LEVERAGE EFFECTS

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $14 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: $42 million with a 0 2 probability, $2 8 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; then evaluate the results:

Debt/Capital Ratio	Interest Rate
0%	-
10	9%
50	11
60	14

Reference no: EM131197446

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