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Problem:

HL and LL are identical firms except for their capital structures. Each has $20 million in assets, earned $4 million before interest and taxes in 2012, and has a 40% marginal tax rate. Firm HL has a debt/ assets ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt/ assets ratio and pays only 10% interest on debt.

Required:

Question: Calculate the rate of return on equity for each firm.

Note: Please show how to work it out.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91172011

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