Investment $10,000,000 ROCE 10% Market rate of return 17% Debt Equity 0 1 1 1 2 1 3 1

To analyze this investment scenario involving Return on Capital Employed (ROCE), market rates of return, and a capital structure divided into debt and equity, let’s break it down step by step.

1. Break Down the Problem

1. Identify the parameters:
   • Total investment = $10,000,000
   • ROCE = 10% (0.10)
   • Market rate of return = 17% (0.17)
   • Debt-equity ratios = 0:1, 1:1, 2:1, 3:1

2. Relevant Concepts

1. Calculate Earnings Before Interest and Taxes (EBIT) based on ROCE: $\text{EBIT} = \text{Investment} \times \text{ROCE} = 10,000,000 \times 0.10 = 1,000,000$

2. Determine Return for each Debt-Equity ratio:

   • Return on Equity (ROE) can be derived from the EBIT minus interest payments (if any debt is present) divided by equity.

3. Assess the effects of leverage: Leverage affects the returns and risk associated with equity holders.

3. Analysis and Detail

• For a Debt to Equity Ratio of 0:1:

  • Debt = $0
  • Equity = $10,000,000
  • ROE = $\frac{EBIT}{Equity} = \frac{1,000,000}{10,000,000} = 10\%$

• For a Debt to Equity Ratio of 1:1:

  • Total financing will be $20,000,000 (i.e.,$10,000,000 debt + $10,000,000 equity)
  • Interest on debt (assuming a certain interest rate, but not provided in the data) needs to be calculated to find ROE.

• For Debt to Equity Ratio of 2:1:

  • Debt = $20,000,000, Equity =$10,000,000
  • Now, as equity is low relative to debt, the interest payments will affect the returns.

• For debt to equity ratio of 3:1:

  • Debt = $30,000,000, Equity =$10,000,000
  • Similar calculations apply; higher debt increases potential returns but also risk.

4. Verify and Summarize

Each calculation steps are directly affected by the understanding of the market return. The overall market context (17%) needs to be considered against ROCE (10%) to decide if this investment is favorable.

Final Answer

• 0:1 Debt-Equity Ratio: ROE = 10%
• 1:1 Debt-Equity Ratio: Needs interest value to calculate ROE.
• 2:1 Debt-Equity Ratio: Needs interest value to calculate ROE.
• 3:1 Debt-Equity Ratio: Needs interest value to calculate ROE.

To evaluate the total effect, the relationship between ROCE, market rate, and leverage must be critically analyzed. If ROCE is less than the market return, investment attractiveness diminishes.