Vanderheiden Press Inc. and the Herrenhouse Publishing Company had the following balance sheets as of December 31, 2007 (thousands of dollars):

Earnings before interest and taxes for both firms are $30 million, and the effective federal-plus-state tax rate is 40%.
a. What is the return on equity for each firm if the interest rate on current liabilities is 10% and the rate on long-term debt is 13%?
b. Assume that the short-term rate rises to 20%. While the rate on new long-term debt rises to 16%, the rate on existing long-term debt remains unchanged. What would be the return on equity for Vanderheiden Press and Herren house Publishing under these conditions?
c. Which company is in a riskier position? Why?

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Current assets Fixed assets (net) Total assets Current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity Vanderheiden Press $100,000 100,000 $200,000 $ 20,000 80,000 50,000 50,000 $200,000 Herrenhouse Publishing $ 80,000 120,000 $200,000 $ 80,000 20,000 50,000 50,000 $200,000