ROIC for firm LL is _____________%ROIC for firm HL is _____________%Fi

QUESTION

ROIC for firm LL is _____________%ROIC for firm HL is _____________%Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $28 million in invested capital, has $5.6 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL,
Alright, since this is basically the same case, ROIC = (Net Operating Profit After Taxes) / (Invested Capital) NOPAT = (Operating Profit) x (1 Tax Rate) Invested Capital = (Total Assets) (Excess Cash) (Non-Interest-Bearing Current Liabilities) TA = 28m Calculate NOPAT for each company: EBIT*(1-T) HL = 5.6m (0.6) = 3.36m LL = 5.6m (0.6) = 3.36m Since there is no excess cash indicated or other current liabilities, IC = TA Hence, ROIC for each firms: HL

= 3.36m/28m = 0.12 = 12 % LL = 3.36m/28m = 0.12 = 12% Note that ROIC is the same for both firms because we did not take into account interest expense (since we use NOPAT instead of NI). Since both firms have the same size of Assets and Operating Income, R

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