What is the return on equity for each firm if the interest rate on current liabilities is 10% and the rate on long-term debt is 13%? Assume that the short-term rate rises to 20%. While the rate on new long-term debt rises to 16%, the rate on existing long-term debt remains unchanged. What would be the returns on equity for Vanderheiden Press and Herrenhouse Publishing under these conditions? Which company is in a riskier position? Why?
What is the return on equity for each firm if the interest rate on current liabilities is 10% and the rate on long-term debt is 13%? Assume that the short-term rate rises to 20%. While the rate on new long-term debt rises to 16%, the rate on existing long-term debt remains unchanged. What would be the returns on equity for Vanderheiden Press and Herrenhouse Publishing under these conditions? Which company is in a riskier position? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- Vanderheiden Press Inc. and Herrenhouse Publishing Company had the following balance sheets as of December 31, 2008 (thousands of dollars Earnings before interest and taxes for both firms are $30 million, and the effective federal-plus-state tax rate is 40%.
|
|
Vanderheiden Press |
Harrenhouse Publishing |
|
Current Assets |
$ 100,000 |
$ 80,000 |
|
Fixed Assets |
$ 100,000 |
$120,000 |
|
Total Assets |
$ 200,000 |
$ 200,000 |
|
|
|
|
|
Current Liabilities |
$ 20,000 |
$ 80,000 |
|
Long-Term Liabilities |
$ 80,000 |
$ 20,000 |
|
Common Stock |
$ 50,000 |
$ 50,000 |
|
Retained Earning |
$ 50,000 |
$ 50,000 |
|
Total Liabilities & Equity |
$ 200,000 |
$ 200,000 |
- What is the
return on equity for each firm if the interest rate on current liabilities is 10% and the rate on long-term debt is 13%? - Assume that the short-term rate rises to 20%. While the rate on new long-term debt rises to 16%, the rate on existing long-term debt remains unchanged. What would be the returns on equity for Vanderheiden Press and Herrenhouse Publishing under these conditions?
- Which company is in a riskier position? Why?
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