You are analyzing the leverage

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

 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

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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