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 pays

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

$300

Debt ratio

50%

Debt ratio

30%

EBIT

$60

Interest rate

12%

Interest rate

10%

Tax rate

35%

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