The Neal Company wants to estimate next year's return 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 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: $5.3 million with a 0.2 probability, $1.5 million with a 0.5 probability, and $900,000 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: % %
The Neal Company wants to estimate next year's return 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 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: $5.3 million with a 0.2 probability, $1.5 million with a 0.5 probability, and $900,000 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: % %
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
Related questions
Question
Transcribed Image Text:The Neal Company wants to estimate next year's return 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
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: $5.3 million with
a 0.2 probability, $1.5 million with a 0.5 probability, and $900,000 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:
O:
CV:
σ:
Debt/Capital ratio is 10%, interest rate is 9%.
RÔE:
CV:
RÔE:
6
O:
Debt/Capital ratio is 50%, interest rate is 11%.
CV:
%
%
σ:
CV:
%
%
%
Debt/Capital ratio is 60%, interest rate is 14%.
RÔE:
%
%
%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education