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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
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 | $200 | Debt ratio | 50% | Debt ratio | 30% | ||
EBIT | $40 | Interest rate | 12% | Interest rate | 10% | ||
Tax rate | 25% |
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