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: $4.7 million with a 0.2 probability, $3.3 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: % 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:
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: |
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
