Final answer:
The question lacks sufficient financial data to calculate the exact return on equity and return on total assets for the two companies; however, returns are expected to decrease if the short-term interest rate rises to 15%. The company with higher short-term liabilities is generally considered to be in a riskier position due to increased liquidity risk.
Step-by-step explanation:
The question involves calculating the return on equity (ROE) and the return on total assets (ROA) for two companies given different interest rates on their short-term and long-term liabilities. However, there is not enough data provided in the question to make these calculations directly. The information provided seems to be part of a larger case study or problem set, where the ROE and ROA would typically be calculated based on a company’s net income, equity, and total assets figures, which are not present in this question.
Assuming the short-term rate rises to 15%, the cost of capital for both companies would increase, thereby reducing their earnings and consequently their returns on equity, but without specific financial data on Company A and Company B’s balance sheets and income statements, it is not possible to calculate the exact ROE under these new conditions.
As for the risk position of the companies, typically, higher short-term debt increases liquidity risk because the debt needs to be repaid or refinanced in the near term, which can be challenging if a company’s revenues or cash reserves are insufficient or if the credit market tightens. On the other hand, higher long-term liabilities might lead to a higher risk if the company is over-leveraged and the cost of servicing the debt overpowers the earnings from the investments made with the borrowed funds.