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The firms HL and LL are identical except for their debt-to-total-assets ratios and interest rates on debt. Each has $20 million in assets, earned $4 million before interest and taxes in 2005, and has a 40 percent marginal tax rate. Firm HL, however, has a debt-to-total-assets ratio (D/TA) of 50 percent and pays 12 percent interest on its debt, whereas LL has a 30 percent debt-to-total-assets ratio and pays only 10 percent interest on debt.Calculate the rate of return on equity (net income/equity) for each firm.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9984967

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