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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
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 ROEHD - ROELD?
Applicable to Both Firms Firm HD's Data Firm LD's Data
Assets $3,000,000 Debt ratio 80% Debt ratio 30%
EBIT $500,000 Int. rate 14% Int. rate 12%
Tax rate 35%
a. 5.24%
b. 5.63%
c. 5.78%
d. 6.05%
e. 6.32%
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