Financial Leverage effects. Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $20 million in assests, has $4 million of EBIT, and is in the 40% federal-plus-state-tax bracket. Firm HL, however, has a debt ratio and pays only 10% interest on its debt.
A. find out 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% . Calcuate the new ROE for LL.