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$13 million in invested capital, has $1.95 million of EBIT, and isin the 40% federal-plus-state tax bracket. Firm HL, however, has adebt-to-capital ratio of 45% and pays 11% interest on its debt,whereas LL has a 25% debt-to-capital ratio and pays only 8%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 25% 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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a For LL Total debt 25 Invested capital Total debt 25 13 Total debt 325 million Interest on debt 8 325 Interest on debt 026 million Similarly for HL Total debt 45 Invested capital Total debt 45 13 Total debt 585 million Interest on debt 11 585 Interest on debt 06435 million Refer to the table for Net See Answer

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Firms HL and LL are identical except for their financialleverage ratios and the interest rates they pay on debt. Each has$13 million in invested capital, has $1.95 million of EBIT, and isin the 40% federal-plus-state tax bracket. Firm HL, however, has adebt-to-capital ratio of 45% and pays 11% interest on its debt,whereas LL has a 25% debt-to-capital ratio and pays only 8%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 25% 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.%