Firms HL and SL are identical except for their leverage ratios and interest rates they pay on debt. Each has 30 M in assets, 6 M in EBIT. The companies are in a 40% federal and state tax bracket. HL has 50% Debt ratio and pays 12% interest on debt. SL has 30% debt and pays 10c interest on debt.
a. Calculate ROE for each firm
b. SL's CFO is considering raising debt to 60% and pay 15% interest on debt. What if all debt is at a 15% rate? Calculate the new ROE for SL in both cases.
a. Calculate ROE for each firm
b. SL's CFO is considering raising debt to 60% and pay 15% interest on debt. What if all debt is at a 15% rate? Calculate the new ROE for SL in both cases.