0.3 probability. Calculate Neal's expected ROE, standard daration, and coefficient of variation for each of the following debt to capital ratios. Rand your answers to two decimal plays 4 Debt/Capital ratio is 0: ROE: S % CV: %0 Debt / Capital ratio is 10% Interest rate is 9%'s ROE 8: %0 CU: هه Debt / Capital ratio is 50%, interest rate is 11% ROE: 010 0/0 brot
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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D Debt/ Capital ratio is o
DROE:.
D
o:
Da:
D
The Neal Company wants to estionate year's
retum on equity (ROE) under different financial leverage
ratios. Neal's total capital is $20 million, it currently
uses only, common equity, it has no future plans to use
prefined-stock in its capital structure, and it's federal-
plus - state tax rate is. 25% Neal is a small firm with
average sale of $25 million or less during the past 3 years,
So it is excompt from the interest deduction limitation. The
CFO has estimated next year's EBIT for three possible
States of the world: $4.4 million with a Q.2 probability,
$1.7 million with a 0.5 probability, and $800,000 with a
0.3 probabilty. Calculate Neal's expected ROE, standard
davlation, and coefficient of variation for each of the following
debt-to-capital ratios. Rand your answers to two decimal places,
32
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o
%%
Debt / Capital ratio is 10% Interest rate is 9%'s
ROE :
10
CU:
%/0
%
UM
Debt / Capital ratio is 50%, interest rate is 11%
www
ROE:
o
CU:
010
0/0
1700
DABAZGEL CA
Debt/ Capital is 60%, interest rate is 14%.
ROE: 10
0: _%
CV..
Bala
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