You are analyzing the leverage

You are analyzing the leverage of two firms and you note thefollowing​ (all values in millions of​ dollars):


Book Equity

Market Equity

Operating Income

Interest Expense

Firm A






Firm B






a. What is the market​ debt-to-equity ratio of each​ firm?

b. What is the book​ debt-to-equity ratio of each​ firm?

c. What is the interest coverage ratio of each​ firm?

d. Which firm will have more difficulty meeting its debt​obligations?


Debt Book equity Market equity Operating income Interest expense
Firm A 500.9 304.4 396.3 98.5 49.2
Firm B 80.7 33.1 39.9 8.5 7.1
Answer a
Market debt to equity = Total debt / (total debt + market value of equity)
Firm A = 500.9/(500.9+396.3)
= 0.56
Firm B = 80.7/(80.7+39.9)
= 0.67
Answer b
Book debt to equity = Total debt / Book equity
Firm A = 500.9/304.4
= 1.65
Firm B = 50.7/33.1
= 1.53
Answer c
Interest coverage ratio = EBIT or Operating income / Interest
Firm A = 98.5/49.2
= 2.00
Firm B = 8.5/7.1
= 1.20
Answer d
Firm B will have more difficulty in meeting its debtobligations as interest coverage ratio of firm B is lesser thanthat of Firm A

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