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The Neal Company wants to estimate next year's return on equity (ROE) under different leverage ratios. Neal's total assets are $14 million, it currently uses only common equity, and its federal-plus-state tax rate is 40 percent. The CFO has estimated next year's EBIT for 3 possible states of the world: $4.2 million with 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 the following debt ratios, and evaluate the results:

Debt Ratio Interest Rate

0%
10 9%
50 11
60 14

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