High Leverage (HL) and Low Leverage (LL) are two firms that are identical except of their capital structure which also affects their interest expense (higher leverage firms typically pay higher interest rates). Each firm has $1,800,000 in invested capital, $408,000 in earnings before interest and taxes (EBIT), and is in the 35% tax bracket. Firm HL has a debt-to-capital ratio of 55% and pays a 13% interest rate on its debt, while Firm LL has a debt-to-capital ratio of 40% and pays an 11% interest rate on its debt. What is the return on equity for HL and LL, respectively? 17.72% ; 17.37% B 17.72%; 22.41% 19.79%; 22.41% 19.79%; 24.02% E 20.76%; 24.02%

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Financial Ratios

A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.

Return on Equity

The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.