Firms HD and LD Are Identical Except for Their Level $\text {Applicable to Both Firms}$

question 33

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

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

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