Firms HD and LD Are Identical Except for Their Level

question 21

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

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

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