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:

Polygraph

A device used to measure and record physiological indicators such as blood pressure, pulse, and respiration, often used in lie detection.

Ascending Reticular Activating System

A network of neurons in the brainstem essential for regulating arousal and consciousness, influencing alertness and the sleep-wake cycle.

Physiological Arousal

The physical state of being alert, involving physiological changes like increased heart rate and adrenaline.

Afferent Fibres

Afferent fibres are nerve fibers that carry sensory information from the body's periphery towards the central nervous system.