Question
You plan to invest in one of two home delivery pizza companies, High and Low, that were recently founded and are about to commence operations.
You plan to invest in one of two home delivery pizza companies, High and Low, that were recently founded and are about to commence operations. They are identical except for their use of debt (wd) and the interest rates on their debt--High uses 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 Capital $3,000,000 wd 70% wd 20% EBIT $500,000 Int. rate 12% Int. rate 10% Tax rate 35% a. 5.41% b. 5.69% c. 5.99% d. 6.29% e. 6.61%
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