ch14 question 1

High Leverage (HL) and Low Leverage (LL) are two firms that are identical except of their capital structure which also affects their interest expense (higher leverage firms typically pay higher interest rates). Each firm has $1,800,000 in irvested capital, $408,000 in earnings before interest and taxes (EeIT), and is in the 35% tax bracket. Firm HL. has a debt-to-capital ratio of 55% and pays a 13\% interest rate on its debt, while Firm LL has a debt-to-capital ratio of 40% and pays an 11% interest rate on its debt. What is the return on equity for HL and LL, respectively? 17.72%;17.37% 17.724;22.41% 19.79%:22.41% 19.79%:24.02% 20.76%;24.02%