Firms HD and LD Are Identical Except for Their Use

question 41

Multiple Choice

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?
80) $\begin{array}{c}\begin{array}{lr}\underline{\text { Applicable to Both Firms }}\\ \text { Capital } \quad \$ 3,000,000 \\\text { EBIT } \quad \$ 500,000 \\\text { Tax rate } \quad 35 \%\end{array}\begin{array}{lll}\underline{\text { Firm HD's Data }}\\ \mathrm{w}_{\mathrm{d}} \quad\quad\quad\quad 70 \% \\\text { Int. rate } \quad 12 \% \\\\\end{array}\begin{array}{lll}\underline{\text { Firm LD's Data }} \\\mathrm{w}_{\mathrm{d}} \quad\quad\quad\quad 20 \% \\\text { Int. rate } \quad 10 \%\\\\\end{array}\end{array}$

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

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Definitions:

Parasympathetic Nervous

Part of the autonomic nervous system that conserves energy as it slows the heart rate, increases intestinal and gland activity, and relaxes sphincter muscles in the gastrointestinal tract.

Endocrine

Pertaining to the system of glands that release hormones directly into the bloodstream to regulate processes such as growth, metabolism, and mood.

Somatic

Pertaining to or affecting the body, especially as distinguished from the mind or the environment.

Autonomic

Relating to the part of the nervous system that controls involuntary bodily functions, such as heartbeat, digestion, and breathing.