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?
A) 5.41%
B) 5.69%
C) 5.99%
D) 6.29%
E) 6.61%

Question

Quizplus · Accepted Answer

ROEHD - ROELD can be calculated as (Net Income / Equity)*100 - (Net Income / Equity)*(1-Debt/Equity)*100. Plugging in the values, we get (720/6000)*100 - (720/6000)*(1-0.6)*100 = 12% - 6.01% = 5.99%. Therefore, the answer is (C) 5.99%.

Firms HD and LD Are Identical Except for Their Use