(ST–2)

Current Asset Financing Vanderheiden Press Inc. and the Herrenhouse Publishing Company had the following balance sheets as of December 31, 2010 (thousands of dollars):

Vanderheiden Press Herrenhouse Publishing Current assets $100,000 $ 80,000 Fixed assets (net) 100,000 120,000 Total assets $200,000 $200,000 Current liabilities $ 20,000 $ 80,000 Long-term debt 80,000 20,000 Common stock 50,000 50,000 Retained earnings 50,000 50,000 Total liabilities and equity $200,000 $200,000 Earnings before interest and taxes for both firms are $30 million, and the effective federal-plus-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%?