Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. firms hl and ll are identical except for their fin

Firms HL and LL are identical except for their financial leverage ratios and the interest...

70.2K

Verified Solution

Question

Finance

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $17 million in invested capital, has $4.25 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 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure.

1. 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 %

2. 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 %

3. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 25% 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.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Physics
1.2K views

PRACTICE PROBLEMS 2016021 8 9 An electric dipole consists of two charges 10 C lying...

Physics
1.2K views

The springs shown are identical When A 4kg the elongation of spring is 1 cm...

Basic Math
1.2K views

In a survey of 2035 workers 73 reported working out 3 or more days a...

Accounting
1.2K views

A product has a sales price of $110 and a per-unit contribution margin of $55....

Accounting
1.2K views

The following transactions pertain to the petty cash fund of Carrington Company: Nov. 2 A...

Accounting
1.2K views

A cost plus contractor calls for the contractor to receive direct costs for labor and...

Accounting
1.2K views

Which of the following expense items can create a loss for home office deduction purposes?...

Accounting
1.2K views

The income statement and a schedule reconciling cash flows from operating activities to net income...

Accounting
1.2K views

Question #1 (22 marks) The following information was available to reconcile AMB Companys book balance...

Accounting
1.2K views

11. The cost of maintenance on the production equipment would likely be: a. direct materials...

Finance
1.2K views

Dozey, a sole trader, is the owner of a business called Sleepy Head which specialises...

Accounting
1.2K views

Bramble Company ended its fiscal year on July 31, 2019. The companys adjusted trial balance...