CURRENT ASSETS FINANCING Vanderheiden Press Inc. and Herrenhouse Publishing Company had the following balance sheets as of December 31, 2014 (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 Short-term debt $ 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 federalplus-

state tax rate is 40%.

a. What is the return on equity for each firm if the interest rate on short-term debt is 10%

and the rate on long-term debt is 13%?

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

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

AppendixL01