Firms HD and LD Are Identical Except for Their Level

question 55

Multiple Choice

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debtσHD 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?
$\begin{array}{lcll}{\text { Applicable to Both Firms }} & {\text { Firm HD's Data }} & \text { Firm LD's Data } \\\text { Assets } & \$ 200 \text { Debt ratio } & 50 \% \text { Debt ratio } & 30 \% \\\text { EBIT } & \$ 40 \text { Interest rate } & 12 \% \text { Interest rate } & 10 \% \\\text { Tax rate } & 35 \% & &\end{array}$

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

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Definitions:

Isolate

To separate or detach something from a group or system, often for the purpose of analysis, treatment, or limiting influence.

Sole Problem

A unique or the only issue at hand that requires resolution.

Information Sharing

The act of exchanging data, knowledge, or insights among individuals, teams, or organizations to facilitate decision-making or problem-solving.

Power Struggles

Conflicts that arise from competing desires or needs for control, dominance, or authority among individuals or groups.