Return on equity under different financial leverage ratios

Assignment Help Financial Management

Reference no: EM131555023

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $20 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: $5 million with a 0.2 probability, $2.8 million with a 0.5 probability, and $0.7 million 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 at the end of the calculations. Debt/Capital ratio is 0. RÔE = 8.2 % σ = % CV = Debt/Capital ratio is 10%, interest rate is 9%. RÔE = 8.6 % σ = % CV = Debt/Capital ratio is 50%, interest rate is 11%. RÔE = % σ = % CV = Debt/Capital ratio is 60%, interest rate is 14%. RÔE = % σ = % CV =

Reference no: EM131555023

Questions Cloud

Identify strengths and weaknesses of the book order process : Identify strengths and weaknesses of the book order process, and provide suggestions for any weaknesses you have identified.

Description of company and industry and incentive plan : Distinguish why you think this particular plan is highly motivating and explain how it stimulates employee productivity.

Discuss about the short-term and long-term incentive : Compare any differences that should be made for employees living and working in Germany and in Japan.

Explain why the system has a unique solution : Suppose the coefficient matrix of a linear system of four equations in four variables has a pivot in each column. Explain why the system has a unique solution.

Return on equity under different financial leverage ratios : The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios.

Prepare an adjusted trial balance : Post the following adjustments. Earned but unbilled fees at July 31 were $1,400, Depreciation for the month was $200. Prepare an adjusted trial balance.

Which of the companys balance sheet accounts represents : Which of the company's balance sheet accounts represents tuture cash inflows from customers for revenue already earned?

Reading portion of the test : Find the probability that a randomly selected high school student who took the reading portion of the test has a score that is less than 16.

What is the most jill should be willing to pay for property : If Jill's other investments are earning at least 14%, what is the most Jill should be willing to pay for this property?

User Account

All Pages