Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each h

[answerhappygod]

Firms HL and LL are identical except for their financialleverage ratios and the interest rates they pay on debt. Each has$11 million in invested capital, has $1.65 million of EBIT, and isin the 25% federal-plus-state tax bracket. Both firms are smallwith average sales of $25 million or less during the past 3 years,so both are exempt from the interest deduction limitation. Firm HL,however, has a debt-to-capital ratio of 60% and pays 11% intereston its debt, whereas LL has a 40% debt-to-capital ratio and paysonly 10% interest on its debt. Neither firm uses preferred stock inits capital structure.