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 $30 million, and the effective federal-plus-state tax rate is 40%. Vanderheiden PressHarrenhouse PublishingCurrent Assets$ 100,000$ 80,000Fixed Assets$ 100,000$120,000Total Assets$ 200,000$ 200,000 Current Liabilities$ 20,000$ 80,000Long-Term Liabilities$ 80,000$ 20,000Common Stock$ 50,000$ 50,000Retained Earning$ 50,000$ 50,000Total 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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Managerial Accounting: The Cornerstone of Business Decision-Making

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ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

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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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