Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
The Neal Company wants to estimate next year’s return
on equity (ROE) under different financial leverage ratios. Neal’s total capital is $14 million,
it currently uses only common equity, it has no future plans to use
capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next
year’s EBIT for three possible states of the world: $4.2 million with a 0.2 probability,
$2.8 million with a 0.5 probability, and $700,000 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; then evaluate the results:
Transcribed Image Text:Debt/Capital
Interest
Ratio
Rate
0%
10
9%
50
11
60
14
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