Firms HD and LD are identical except for their use of debt and the interest rates they pay--HD has more debt and thus must pay a higher interest rate. Based on the data given below, how much higher or lower will HD's ROE be versus that of LD, i.e., what is ROE_HD - ROE_LD?

Applicable to Both Firms Firm HD's Data Firm LD's Data

Assets $3,000,000 Debt ratio 80% Debt ratio 25%

EBIT $500,000 Int. rate 14% Int. rate 12%

Tax rate 35%

a. 5.30%

b. 5.63%

c. 5.92%

d. 6.05%

e. 6.32%