Firms HD and LD are identical except for their use of debt and the interests rat

Question

Firms HD and LD are identical except for their use of debt and the interests rates they pay-- HD has more debt and thus must pay a higher rate interest. Based on the data below, how much higher or lower will HD's ROE be versus that of LD, i.e., what is ROE HD and ROE LD? . . Aplicable to both firms. Capital $3,000,000. EBIT $5000,000. Tax Rate 35%. . Firm HD's data Wd 70%. Interest rate 12%. . Firm LD's data. . Wd 20%. Interest rate 10%. . Answers. A) 5.41%. B) 5.69%. C) 5.99%. D) 6.37%. E) 6.61% Firms HD and LD are identical except for their use of debt and the interests rates they pay-- HD has more debt and thus must pay a higher rate interest. Based on the data below, how much higher or lower will HD's ROE be versus that of LD, i.e., what is ROE HD and ROE LD? . . Aplicable to both firms. Capital $3,000,000. EBIT $5000,000. Tax Rate 35%. . Firm HD's data Wd 70%. Interest rate 12%. . Firm LD's data. . Wd 20%. Interest rate 10%. . Answers. A) 5.41%. B) 5.69%. C) 5.99%. D) 6.37%. E) 6.61% Firms HD and LD are identical except for their use of debt and the interests rates they pay-- HD has more debt and thus must pay a higher rate interest. Based on the data below, how much higher or lower will HD's ROE be versus that of LD, i.e., what is ROE HD and ROE LD? . . Aplicable to both firms. Capital $3,000,000. EBIT $5000,000. Tax Rate 35%. . Firm HD's data Wd 70%. Interest rate 12%. . Firm LD's data. . Wd 20%. Interest rate 10%. . Answers. A) 5.41%. B) 5.69%. C) 5.99%. D) 6.37%. E) 6.61%

Explanation / Answer

There are two mistakes in the question;

The EBIT would be 500,000

And required question should be difference between ROE of HD & LD.

Common Data Details Amt $ Capital            3,000,000 EBIT            5,000,000 Tax Rate 35% FIRM HD Wd 70% Amt of debt            2,100,000 Amt Of Equity                900,000 Interest rate 12% Interest Amt                252,000 EBIT                500,000 Less Interest                252,000 EBT                248,000 Tax @35%                  86,800 Net Income                161,200 ROE =Net Income/Equity 17.91% FIRM HD Wd 20% Amt of debt                600,000 Amt Of Equity            2,400,000 Interest rate 10% Interest Amt                  60,000 EBIT                500,000 Less Interest                  60,000 EBT                440,000 Tax @35%                154,000 Net Income                286,000 ROE =Net Income/Equity 11.92% Difference in ROE =5.99% Ans C is correct

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