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?

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...

Jun 07, 2022