Question
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
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?
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| Applicable to Both Firms |
| Firm HD's Data |
| Firm LD's Data | |||||
|
| Assets | $300 |
| Debt ratio | 50% |
| Debt ratio | 30% | ||
|
| EBIT | $60 |
| Interest rate | 12% |
| Interest rate | 10% | ||
|
| Tax rate | 35% |
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International Financial Management
Authors: Jeff Madura
2nd Edition
0314430296, 978-0314430298
