Vanderheiden Press Inc. and Herrenhouse Publishing
Company had the following balance sheets as of December 31, 2018 (thousands of dollars):
Earnings before interest and taxes for both firms are $30 million, and the effective federalplus-
state tax rate is 40%.
a. What is the return on equity for each firm if the interest rate on short-term debt is 10%
and the rate on long-term debt is 13%?
b. Assume that the short-term rate rises to 20%. Although 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?
c. Which company is in a riskier position? Why?
Extracted text: Vanderheiden Herrenhouse Press Publishing $ 100,000 $ 80,000 Current assets 120,000 $ 200,000 Fixed assets (net) 100,000 Total assets $ 200,000 $ 20,000 $ 80,000 Short-term debt Long-term debt 80,000 20,000 Common stock 50,000 50,000 Retained earnings 50,000 $ 200,000 50,000 Total liabilities and equity $ 200,000