Author Question: Firms HD and LD are identical except for their level of debt and the interest rates they pay on ... (Read 32 times)

billyboy7272 · **on:** Aug 7, 2023

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt—HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms’ ROEs?

Applicable to Both Firms	Firm HD’s Data	Firm LD’s Data
Assets $300	Debt ratio 60%	Debt ratio 20%
EBIT $80	Interest rate 15%	Interest rate 11%
Tax rate 40%

Applicable to Both Firms	Firm HD’s Data	Firm LD’s Data
Assets $200	Debt ratio 50%	Debt ratio 30%
EBIT $40	Interest rate 12%	Interest rate 10%
Tax rate 35%

◦

8.15%

◦

8.69%

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9.21%

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9.54%

GoldenBrown · **Reply #1 on:** Aug 7, 2023

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