Firms HD and LD Are Identical Except for Their Level

question 48

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?
$$\begin{array}{l}\begin{array} { l } \underline{({\text { Applicable to Both Firms }}) }\\\text { Assets } & \$ 200 \\\text { EBIT } & \$ 40\\\text { Tax rate } & 35 \%\\\end{array}\begin{array} { l } \underline{( {\text { Firm HD's Data }}) }\\\text { Debt ratio } & 50 \%\\\text { Interest rate } & 12 \% \\\end{array}\begin{array} { l } \underline{({\text { Firm LD's Data }}) }\\\text { Debt ratio } & 30 \%\\\text { Interest rate } & 10 \% \\\end{array}\end{array}$$

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Definitions:

PERT

Program Evaluation and Review Technique; a project management tool used to schedule, organize, and coordinate tasks within a project.

CPM

Critical Path Method, a project management technique used to estimate the duration of a project and determine the activities that are critical to project completion.

EllisDon

A construction and building services company known for undertaking major projects and providing comprehensive solutions across different markets.

Construction Industry

A sector that focuses on the development, building, and maintenance of structures such as buildings, roads, and bridges.