Vanderheiden Press Inc. and the Herrenhouse Publishing Company had the following balance sheets as of December 31, 2013 (thousands of dollars):

Earnings before interest and taxes for both firms are $30 million, and the effective federalplus-state tax rate is 40%.

a. What is the return on equity for each firm if the interest rate on current liabilities is 10% and the rate on long-term debt is 13%?

b. Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to 16%, and that the rate on existing long-term debt remains unchanged. What would be the return on equity for Vanderheiden Press and Herrenhouse Publishing under these conditions?

c. Which company is in a riskier position? Why?  

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Current assets Fixed assets (net) Total assets Current liabilities Long-term debt Common stock Vanderheiden Press $100,000 100,000 $200,000 $ 20,000 80,000 50,000 Herrenhouse Publishing $ 80,000 120,000 $200,000 $ 80,000 20,000 50,000 Retained earnings 50,000 50,000 Total liabilities and equity $200,000 $200,000