Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt?HD has more debt and pays a higher interest rate on that debt.Based on the data given below,what is the difference between the two firms' ROEs? $\text {Applicable to Both Firms}$ $\quad $ $\quad $$\text {Firm HD's Data}$$\quad $$\text {Firm LD's Data}$
$\begin{array}{lcl}
\text { Assets } & \$ 200 D \text { Debtratio } & 50 \% \text { Debt ratio }&30\% \
\text { EBIT } & \$ 40 \text { Interest rate } & 12 \% \text { Interest rate } &10\%\
\text { Tax rate } & 35 \% &
\end{array}$
A)2.18%
B)2.29%
C)2.41%
D)2.54%
E)2.66%

Question

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt?HD has more debt and pays a higher interest rate on that debt.Based on the data given below,what is the difference between the two firms' ROEs? $\text {Applicable to Both Firms}$ $\quad $ $\quad $$\text {Firm HD's Data}$$\quad $$\text {Firm LD's Data}$
$\begin{array}{lcl}
\text { Assets } & \$ 200 D \text { Debtratio } & 50 \% \text { Debt ratio }&30\% \
\text { EBIT } & \$ 40 \text { Interest rate } & 12 \% \text { Interest rate } &10\%\
\text { Tax rate } & 35 \% &
\end{array}$ 
A)2.18%
B)2.29%
C)2.41%
D)2.54%
E)2.66%

Quizplus · Accepted Answer

The difference in ROE is calculated by first determining the net income for each firm after accounting for interest and taxes, then dividing by equity. Firm HD has higher interest expenses due to more debt and a higher interest rate, leading to a lower net income and thus a lower ROE compared to Firm LD. The calculations show a difference of 2.41% in ROE.

Firms HD and LD Are Identical Except for Their Level Applicable to Both Firms\text {Applicable to Both Firms}Applicable to Both Firms

Firms HD and LD Are Identical Except for Their Level $\text {Applicable to Both Firms}$