The Neal Company wants to estimate next year\'s return on equity(ROE) under diff

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

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