Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $10 million in invested capital, has $1.5 million of EBIT, and is in the25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 11% interest on its debt, whereas LL has a 30%-debt-to-capital ratio and pays only 8%interest on its debt. Neither firm uses preferred stock in its capital structure.a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.ROIC for firm LL:ROIC for firm HL:%%b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.ROE for firm LL:ROE for firm HL:%%c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LL's interest rate on all debt to15%. Calculate the new ROE for LL. Round your answer to two decimal places.%

Here's a detailed calculation for better understanding. Part A: Calculate the Return on Invested…

Answered: Firms HL and LL are identical except…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Firm U is an all-equity firm and has a market value of $100,000 and EBIT of $300,000. Firm L has identical EBIT, but it uses 40% debt in its capital structure. Firm L pays a total annual interest of $3000 on its debt. Both firms satisfy the MM assumptions. Taxes are absent. 1) Ryan is the holder of $9,000 worth of L's stock. What rate of return can he expect, assuming a dividend pay-out of 100%? 2) Using homemade leverage, show how Ryan could generate identical cash flows and rate of return by investing in Firm U.
North Pole and South Pole are competitors in the same Industry, Both companies face a 22 % Income tax rate. Both con es are levered. (North Pole and South Pole had the same equity Betas, 1.17, when they were still unlevered.) Their capital structures look like this: North Pole South Pole Debt S 3,020, 000 S 3,930,000 Equity S 3,930,000 S 3,020,000 For both companies, the Betas for their debt is zero. Additional information about the market: The market portfolio's expected retum is 12 %. The T-bill rate is 4 %. a. What is the Beta of equity for North Pole and South Pole? (Do not round Intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. In addition, calculate the required return on equity that would correctly reflect the level of systematic risk. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Firm AB and Firm YZ are identical except for their debt-to-total-assets rations (D/TAs) and interest rates on debt. Each has $250,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm AB has a D/TA ratio of 40 percent and pays 7.5 percent interest on its debt, whereas YZ has a 60 percent D/TA ratio and pays 10 percent interest on debt. Each firm has 5,000 shares of common stock outstanding. Calclulate each firm's EPS and ROE (ROE = Net income/Equity).
North Pole and South Pole are competitors in the same industry. Both companies face a 23 % income tax rate. Both companies are levered. (North Pole and South Pole had the same equity Betas, 1.18, when they were still unlevered.) Their capital structures look like this: North Pole South Pole Debt $3,030,000 $3,940,000 Equity $3,940,000 $3,030,000 For both companies, the Betas for their debt is zero. Additional information about the market: The market portfolio's expected return is 12.1 %. The T-bill rate is 4.1 %. a. What is the Beta of equity for North Pole and South Pole? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. In addition, calculate the required return on equity that would correctly reflect the level of systematic risk. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. b. North Pole South Pole. North Pole South Pole % %
ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. Compute the costs of equity for both ABC and XYZ.
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 9.1%. Also, bonds can be issued at a pretax cost of 8.5%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $80. Flotation costs will be $5 per share. The recent common stock dividend was $4.00. Dividends are expected to grow at 3% in the future. What is the cost of external equity? PLEASE INPUT THE ANSWER IN PERCENT ROUNDING IT TO 2 DECIMALS. DO NOT INCLUDE % SIGN, E.G., INSTEAD OF 9.99% INPUT 9.99
Contractual Engineering Incorporated (GEI) has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The company's tax rate is 39 percent. What is the company's WACC?
Barclay Corp is operating in a country K where the corporate tax is 40%, personal income tax on bond investment is 25% while the personal tax on stock is 29%. Assume the firm’s earnings before interest and taxes is $5,400,000 and cost of equity with zero debt is 9%. (Please Show Work) If Barclay current has $12 million total market value of debt financing, what would be the market value of the company of Barclay Corp in this country K?(Please Show Work) What is the proportion of debt (wd) and equity (ws) financing for Barclay Corp with financial leverage? (Please Show Work)
Kendall Corporation has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 10 percent, and there is no corporate tax. What is the company’s cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32. If the firm converts to 10 percent debt, what will its cost of equity be? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. If the firm converts to 45 percent debt, what will its cost of equity be? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the company’s WACC in parts (b) and (c)? Note: Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.
Three companies that subcontract with automobile manufacturers have the fol- lowing debt and equity capital amounts and D-E mixes. Assume all equity capital is in the form of stock. Assume the annual revenue is $15 million for each corporation and that, after debt service is considered, the net incomes are $14.4, $13.4, and $10.0 million, respectively. Compute the return on stock for each company, and comment on the return relative to the D-E mixes.
ruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $500 billion. Under the Miller model, what is Cruz’s value if the federal-plus-state corporate tax rate is 28%, the effective personal tax rate on stock is 17%, and the personal tax rate on debt is 29%?
Explain well with proper step by step and type the answer.

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