Question: 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

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?

Applicable to Both Firms Firm HD

'

s Data Firm LD

'

s Data

Assets $

200

Debt ratio

50 %

Debt ratio

30 %

EBIT $

40

Interest rate

12 %

Interest rate

10 %

Tax rate

25 %

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