Business, 25.11.2021 14:00 jocelyngracia

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $3 million of EBIT, and is in the 25% 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 35% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure. Required:
a. Calculate the return on invested capital (ROIC) for each firm.
b. Calculate the rate of return on equity (ROE) for each firm
c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 20% to 60%, even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL.

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Firms HL and LL are identical except for their financial leverage ratios and the interest rates they...

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