Final answer:
The question revolves around calculating the expected ROE, standard deviation, and coefficient of variation for Neal Company across various debt-to-capital ratios, taking into account a 25% tax rate and the provided EBIT estimates for different scenarios.
Step-by-step explanation:
The student is asking to calculate the expected Return on Equity (ROE), standard deviation, and coefficient of variation for Neal Company given different debt-to-capital ratios. The calculation of ROE requires understanding of financial leverage and its impact on equity returns. The different scenarios of debt-to-capital ratios, such as 0.2, 0.5, and 0.3, represent varying levels of financial leverage that Neal Company might deploy. The tax rate of 25% mentioned will affect the net income and consequently the ROE as well. To provide the calculations, it is necessary to have the estimated EBIT for each state of the world and details about interest expenses and equity levels under each debt-to-capital ratio.
Instances are given about different companies and scenarios showing examples where the cost of financial capital is weighed against the potential return on investment, both privately and socially. Understanding the cost of capital, the social benefits, and the company's return thresholds, influences investment decisions. These scenarios highlight how leveraging and the addition of social benefits affect a firm's demand for capital, ultimately impacting ROE.