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Financial leverage effects
Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $30 million in invested capital, has $9 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 30% debt-to-capital ratio and pays only 10% 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 30% 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.
%
A firm has total assets of $280,000, a total asset turnover rate of 1.6, a debt-equity ratio .4, and a return on equity of 13.25 percent. What is the firm's net income?
Compute the gross profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places and does the firm have positive or negative financial leverage? Briefly explain.
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Triton company's copy department, which does almost all of the photocopying for the sales department and the administrative department, budgets the following costs for the year, based on the expected activity of copies:
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how do they earn their return on equity?when we discussed dupont analysis and corporate strategy we noted that return
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