Problem:
Firms R and S are similar firms in the same industry. Firms R and S have the same profit margin and total asset turnover when compared. However, Firm R's capital structure is 60% debt, 40% equity, and Firm S's capital structure is 30% debt, 70% equity.
Required:
Question: Given the above conditions, which firm will experience the highest return on equity (ROE)? Why?
Note: Provide support for your rationale.