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

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The Neal Company wants to estimate next year's return on equity(ROE) under different financial leverage ratios. Neal's totalcapital is $10 million, it currently uses only common equity, ithas no future plans to use preferred stock in its capitalstructure, and its federal-plus-state tax rate is 40%. The CFO hasestimated next year's EBIT for three possible states of the world:$4.2 million with a 0.2 probability, $2.9 million with a 0.5probability, and $0.9 million with a 0.3 probability. CalculateNeal's expected ROE, standard deviation, and coefficient ofvariation for each of the following debt-to-capital ratios. Do notround intermediate calculations. Round your answers to two decimalplaces at the end of the calculations.
Debt/Capital ratio is 0.
RÔE = %
? = %
CV =
Debt/Capital ratio is 10%, interest rate is 9%.
RÔE = %
? = %
CV =
Debt/Capital ratio is 50%, interest rate is 11%.
RÔE = %
? = %
CV =
Debt/Capital ratio is 60%, interest rate is 14%.
RÔE = %
? = %
CV =

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4.5 Ratings (822 Votes)

Debt capital Ratio is 0Calculation of Return on EquityCalculation of expected EBITStateProbabilityEBITAExpected EBITBVarianceASumB2Pi x var1024208426896053792205291450115600578303090272755608266825614224 Sq rt 14224 119CV Standard deviation mean 119256 046Return on Equity Equity earningsTotal See Answer

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Transcribed Image Text

The Neal Company wants to estimate next year's return on equity(ROE) under different financial leverage ratios. Neal's totalcapital is $10 million, it currently uses only common equity, ithas no future plans to use preferred stock in its capitalstructure, and its federal-plus-state tax rate is 40%. The CFO hasestimated next year's EBIT for three possible states of the world:$4.2 million with a 0.2 probability, $2.9 million with a 0.5probability, and $0.9 million with a 0.3 probability. CalculateNeal's expected ROE, standard deviation, and coefficient ofvariation for each of the following debt-to-capital ratios. Do notround intermediate calculations. Round your answers to two decimalplaces at the end of the calculations.Debt/Capital ratio is 0.RÔE =%? =%CV =Debt/Capital ratio is 10%, interest rate is 9%.RÔE =%? =%CV =Debt/Capital ratio is 50%, interest rate is 11%.RÔE =%? =%CV =Debt/Capital ratio is 60%, interest rate is 14%.RÔE =%? =%CV =