Financial leverage effects Firms HL and LL are identical except for their levera

Question

Financial leverage effects Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $29 million in invested capital, has $5.8 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 11% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.A.ROIC for firm LL is_____?B.ROIC for firm HL is______?

Explanation / Answer

HL: D/TA = 55%. EBIT--------------------------------$5,800,000 Interest ($15,950,000* 0.11)-----$1,754,000 --------------------------------------------------- EBT---------------------------------$4,045,500 Tax (40%)--------------------------$ 1,618,200 ---------------------------------------------------- Net income------------------------$2,427,300 Return on equity = $2,427,300/$15,950,000 = 15.2%. LL: D/TA = 30%. EBIT--------------------------------$5,800,000 Interest ($8,700,000* 0.09)--------$783,000 --------------------------------------------------- EBT---------------------------------$5,017,000 Tax (40%)--------------------------$2,006,800 ---------------------------------------------------- Net income------------------------$3,010,200 Return on equity = 3,010,200/8,700,000 =34.6%

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.