financial leverage effects firms hl and ll are identical except for their financial leverage ratios and the interest rates they pay on debt. each has $20 million in invested capital, has $4 million of ebit, and is in the 25% federal-plus-state tax bracket. both firms are small with 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 50% and pays 12% interest on its debt, whereas ll has a 30% debt-to-capital ratio and pays only 10% interest on its debt. neither firm uses preferred stock in its capital structure.