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%

a. 3.07%

b. 2.93%

c. 2.79%

d. 2.51%

e. 2.65%

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