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10 May, 22:31

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 12% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.

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  1. 11 May, 02:02
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    11.25%; 11.25%

    Explanation:

    Given that,

    Invested capital of each company = $20 million

    EBIT = $3 million

    Federal-plus-state tax bracket = 25%

    ROIC for LL:

    = EBIT * (1 - Tax rate) : Invested capital

    = [$3 * (1 - 25%) ] : $20

    = 0.1125 * 100

    = 11.25%

    ROIC for HL:

    = EBIT * (1 - Tax rate) : Invested capital

    = [$3 * (1 - 25%) ] : $20

    = 0.1125 * 100

    = 11.25%
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