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eBook The Neal Company wants to estimate next year's return on equity (ROE) under different...

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Finance

eBook

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $12 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 25%. Neal is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. 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 $600,000 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. Do not round intermediate calculations. Round your answers to two decimal places.

Debt/Capital ratio is 0.

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Debt/Capital ratio is 10%, interest rate is 9%.

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Debt/Capital ratio is 50%, interest rate is 11%.

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Debt/Capital ratio is 60%, interest rate is 14%.

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