The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $16 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 25%. Neal is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The CFO has estimated next year's EBIT for three possible states of the world: $5.9 million with a 0.2 probability, $2.1 million with a 0.5 probability, and $600,000 with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places. Debt/Capital ratio is 0. RÔE: % σ: % CV: Debt/Capital ratio is 10%, interest rate is 9%. RÔE: % σ: % CV: Debt/Capital ratio is 50%, interest rate is 11%. RÔE: % σ: % CV: Debt/Capital ratio is 60%, interest rate is 14%. RÔE: % σ: % CV:
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
The Neal Company wants to estimate next year's
Debt/Capital ratio is 0.
| RÔE: | % |
| σ: | % |
| CV: |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE: | % |
| σ: | % |
| CV: |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE: | % |
| σ: | % |
| CV: |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE: | % |
| σ: | % |
| CV: |
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