Firms and are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $ million in invested capital has $ million
of EBIT, and is in the federalplusstate tax bracket. Both firms are small with average sales of $ million or less during the past years, so both are exempt
from the interest deduction limitation Firm HL however, has a debttocapital ratio of and pays interest on its debt, whereas LL has a debttocapital
ratio and pays only 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.
b Calculate the 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, LLs treasurer is thinking of raising the debttocapital ratio from to even though that would increase
interest rate on all debt to Calculate the new ROE for LL Round your answer to two decimal places.
