Debt/Capital ratio is 0

Probability

EBIT

Equity

Debt

Interest

Net income= (EBIT-interest)*(1-tax)

ROE (Net
Income /
Equity)

0.2

$4,600,000

$16,000,000

$2,760,000 ($4,600,000-$0)*(1-0.40)

17.25%

0.5

$2,300,000

$16,000,000

$1,380,000($2,300,000-$0)*(1-0.40)

8.63%

0.3

$900,000

$16,000,000

$540,000 ($900,000-$0)*(1-0.40)

3.38%

Expected ROE = 0.2*17.25% + 0.5*8.63% +0.3*3.38%

Expected ROE = 8.78%

Standard Deviation = Square root (0.2*(17.25%-8.78%)^2 + 0.5*(8.63%-8.78%)^2 +0.3*(3.38%8.78%)^2)

Standard Deviation = 4.81%

CV = 4.81% / 8.78%
CV = 0.55

Debt/Capital ratio is 10%, interest rate is 9%

Probability EBIT

Equity

Debt

Interest

Net income= (EBIT-interest)*(1-tax)

ROE (Net
Income /
Equity)

0.2

$4,600,000

$14,400,000

$1,600,000

$144,000

$2,673,600 ($4,600,000-$144,000)*(1-0.40)

18.57%

0.5

$2,300,000

$14,400,000

$1,600,000

$144,000

$1,293,600($2,300,000-$144,000)*(1-0.40)

8.98%

0.3

$900,000

$14,400,000

$1,600,000

$144,000

$453,600 ($900,000-$144,000)*(1-0.40)

3.15%

Expected ROE = 0.2*18.75% + 0.5*8.98% +0.3*3.15%

Expected ROE = 9.18%

Standard Deviation = Square root (0.2*(18.57%-9.18%)^2 + 0.5*(8.98%-9.18%)^2 +0.3*(3.15%9.18%)^2)

Standard Deviation = 5.35%

CV = 5.35% / 9.18%

CV = 0.58

Debt/Capital ratio is 50%, interest rate is 11%

Probability EBIT

Equity

Debt

Interest

Net income= (EBIT-interest)*(1-tax)

ROE (Net
Income /
Equity)

0.2

$4,600,000

$8,000,000

$8,000,000

$880,000

$2,232,000 ($4,600,000-$880,000)*(1-0.40)

27.9%

0.5

$2,300,000

$8,000,000

$8,000,000

$880,000

$852,000($2,300,000-$880,000)*(1-0.40)

10.65%

0.3

$900,000

$8,000,000

$8,000,000

$880,000

$12,000 ($900,000-$880,000)*(1-0.40)

0.15%

Expected ROE = 0.2*27.9% + 0.5*10.65% +0.3*0.15%

Expected ROE = 10.95%

Standard Deviation = Square root (0.2*(27.9%-10.95%)^2 + 0.5*(10.65%-10.95%)^2 +0.3*(0.15%10.95%)^2)

Standard Deviation = 9.62%

CV = 9.62% / 10.95%
CV = 0.88

Debt/Capital ratio is 60%, interest rate is 14%

Probability EBIT

Equity

Debt

Interest

0.2

$4,600,000

$6,400,000

$9,600,000

$1,344,000 $1,953,600 ($4,600,000-$1,344,000)*(1-0.40)

30.53%

0.5

$2,300,000

$6,400,000

$9,600,000

$1,344,000 $573,600($2,300,000-$1,344,000)*(1-0.40)

8.97%

0.3

$900,000

$6,400,000

$9,600,000

$1,344,000 -$266,400 ($900,000-$1,344,000)*(1-0.40)

-4.17%

Expected ROE = 0.2*30.53% + 0.5*8.97% +0.3*-4.17%

Net income= (EBIT-interest)*(1-tax)

ROE (Net
Income /
Equity)

Expected ROE = 9.34%

Standard Deviation = Square root (0.2*(30.53%-9.34%)^2 + 0.5*(8.97%-9.34%)^2 +0.3*(-4.17%9.34%)^2)

Standard Deviation = 12.03%

CV = 12.03% / 9.34%
CV = 1.29