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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Definitions:

GDP

Gross Domestic Product, the total market value of all final goods and services produced within a country in a given period, used as a broad measure of economic performance.

Risk-Free Rate

The theoretical rate of return of an investment with zero risk, often represented by the yield on government securities such as U.S. Treasury bills.

Future Exchange Rate

The anticipated value of one currency in terms of another currency at a future date, often used in hedging and trading strategies.

Indifferent

A state of having no preference or being neutral between two or more choices in decision-making scenarios.