Question: Financial leverage effects
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $12 million, it currently uses only common equity, it has no future plans to use preferred stock in its 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: $4.1 million with a 0.2 probability, $2.7 million with a 0.5 probability, and $0.7 million 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. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
RÔE = %
s = %
CV =
Debt/Capital ratio is 10%, interest rate is 9%.
RÔE = %
s = %
CV =
Debt/Capital ratio is 50%, interest rate is 11%.
RÔE = %
s = %
CV =
Debt/Capital ratio is 60%, interest rate is 14%.
RÔE = %
s = %
CV =