Vanderheiden Press Inc. and the Herrenhouse Publishing Company had the following balance sheets as of December 31,
Question:
Vanderheiden Press Inc. and the Herrenhouse Publishing Company had the following balance sheets as of December 31, 2007 (thousands of dollars):
Earnings before interest and taxes for both firms are $30 million, and the effective federal-plus-state tax rate is 40%.
a. What is the return on equity for each firm if the interest rate on current liabilities 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 return on equity for Vanderheiden Press and Herrenhouse Publishing under these conditions?
c. Which company is in a riskier position? Why?
Intermediate Accounting Reporting and Analysis
ISBN: 978-1285453828
2nd edition
Authors: James M. Wahlen, Jefferson P. Jones, Donald Pagach