Determining capital structure and dividend policy

Reference no: EM13115427

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 debt, while firm B has a 30% debt ration and pays only 10% interest on its debt. What is the difference between the two firm' ROEs?

Reference no: EM13115427

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