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%

---

Definitions:

Cylinders

Geometric shapes or mechanical parts that are solid and have straight parallel sides with a circular or oval cross-section and equally shaped ends.

Drill Bits

Cutting tools used to remove material to create holes, almost always of circular cross-section.

Taper Ratio

The ratio describing how much a tapered feature reduces in diameter over a specified length.

Taper Angle

The angle at which a tapered feature decreases in diameter from one part to another.