The Neal Company wants to estimate next year\'s return on equity(ROE) under diff
ID: 2661518 • Letter: T
Question
The Neal Company wants to estimate next year's return on equity(ROE) under different leverage ratios. Neal's total assets are $14million, it currently uses only common equity, and itsfederal-plus-state tax rate is 40 percent. The CFO has estimatednext year's EBIT for 3 possible states of the world: $4.2 millionwith a .2 probability, $2.8 million with a .5 probability, and$700,000 with a .3 probability. Calculate Neal's expected ROE,standard deviation, and coefficient of variation for each of thefollowing debt ratios, and evaluate the results:DebtRatio Interest Rate
0% -
10 9%
50 11
60 14
Explanation / Answer
x.