Firms HD and LD Are Identical Except for Their Level

question 53

Multiple Choice

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? Applicable to Both Firms Firm HD's Data Firm LD's Data
Assets $200 Debt ratio 50% Debt ratio 30%
EBIT $40 Interest rate 12% Interest rate 10%
Tax rate 35%

• A) 2.18%
• B) 2.29%
• C) 2.41%
• D) 2.54%
• E) 2.66%

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Definitions:

Collagen Development

The process by which collagen, a key protein that provides structure and strength to connective tissues, is synthesized and arranged in the body.

Osteomalacia

Softening of bones due to calcium depletion; adult rickets.

Calcium Depletion

A condition where the body has insufficient levels of calcium, which can lead to weakened bones and other health issues.

Bone Matrix

The intercellular substance of bone tissue, consisting of collagen fibers and ground substance, that gives the bone its strength and rigidity.