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Category > Business & Finance Posted 31 Jul 2017 My Price 6.00

Firms HL and LL are identical except

Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $20 million in assets, has $4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt ratio (D/A) of 50% and pays 12% interest on its debt, whereas LL has a 30% debt ratio and pays only 10% interest on its debt.
a. Calculate the rate of return on equity (ROE) for each firm.
b. Observing that HL has a higher ROE, LL’s treasurer is thinking of raising the debt ratio from 30% to 60% even though that would increase LL’s interest rate on all debt to 15%. Calculate the new ROE for LL

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Status NEW Posted 31 Jul 2017 03:07 PM My Price 6.00

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