Financial leverage effects
The Nylex company want to estimate next year's return on equity (ROE) under different financial leverage ratios. Nylex's total capital is $14 million, it currently use only common equity, it has no future plans to use preferred stock in its capital structure, and its corporate tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.2 million with a 0.2 probability, $2.8 million with a 0.5 probaility,and $700,000 with a 0.3 probability. Calulate Nylex's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios; then evaluate the results: