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24 March, 10:59

Debt Book Equity Market Equity Operating Income Interest Expense Firm A 500 300 400 100 50 Firm B 80 35 40 8 7 1. What is the market debt-to-equity ratio of each firm? 2. What is the book debt-to-equity ratio of each firm? 3. What is the interest coverage ratio of each firm? 4. Which firm will have more difficulty meeting its debt obligations?

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  1. 24 March, 13:07
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    Data for Question

    Debt Book Equity Market Equity Operating Income Interest Expense

    Firm A

    500 300 400 100 50

    Firm B

    80 35 40 8 7

    1.

    Market debt-to-equity ratio = Debt of Firm / Market Equity

    Firm A = 500 / 400 = 1.25

    Firm B = 80 / 40 = 2

    2.

    Book debt-to-equity ratio = Debt of Firm / Book Equity

    Firm A = 500 / 300 = 1.67

    Firm B = 80 / 35 = 2.29

    3.

    Interest coverage ratio = Operating Income / Interest Expense

    Firm A = 100 / 50 = 2

    Firm B = 8 / 7 = 1.14

    4.

    Firm B will have more difficulty meeting its debt obligations because it has higher debt equity ratio and lower interest coverage ratio than Firm A.
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