Firms HL and LL are identical except for their financialleverage ratios and the interest rates they pay on debt. Each has$17 million in invested capital, has $3.4 million of EBIT, and isin the 40% federal-plus-state tax bracket. Firm HL, however, has adebt-to-capital ratio of 55% and pays 12% interest on its debt,whereas LL has a 30% debt-to-capital ratio and pays only 10%interest on its debt. Neither firm uses preferred stock in itscapital structure.
- Calculate the return on invested capital (ROIC) for each firm.Round your answers to two decimal places.
ROIC for firm LL is ? %
ROIC for firm HL is ? % - Calculate the rate of return on equity (ROE) for each firm.Round your answers to two decimal places.
ROE for firm LL is ? %
ROE for firm HL is ? % - Observing that HL has a higher ROE, LL's treasurer is thinkingof raising the debt-to-capital ratio from 30% to 60% even thoughthat would increase LL's interest rate on all debt to 15%.Calculate the new ROE for LL. Round your answer to two decimalplaces.
? %
