Firms A and B are identical except for their level of debt and the interest...
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Accounting
Firms A and B are identical except for their level of debt and the interest rates they pay on debt.
Each has $2 million in assets, $400,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 50% and pays 12% interest on its debt.
While Firm B has a 30% debt ratio and pays only 10% interest on its debt.
Required:
a) Determine the return on equity for each firm.
b) Explain why Firm B pays lower interest.
(Please show your work part-by-part)
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