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

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Finance

Firms HL and LL are identical except for their financialleverage ratios and the interest rates they pay on debt. Each has$17 million in invested capital, has $3.4 million of EBIT, and isin the 40% federal-plus-state tax bracket. Firm HL, however, has adebt-to-capital ratio of 55% and pays 12% 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 itscapital 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 thinkingof raising the debt-to-capital ratio from 30% to 60% even thoughthat would increase LL's interest rate on all debt to 15%.Calculate the new ROE for LL. Round your answer to two decimalplaces.
? %

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Solution a ROIC for firm LL is 1200 ROIC for firm HL is 1200 Working Notes Return on invested capital ROIC will be same both of the firm as both have same amount of invested capital generate same amount of EBIT and are in same tax bracket And Return on invested capital ROIC EBIT x 1 tax rateInvested capital Return on invested capital ROIC 3400000 x 1 04017000000 Return See Answer

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