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german
3 years ago
9

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 ma

rket 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?
Business
1 answer:
trapecia [35]3 years ago
3 0

Answer:

Data for Question

<u>Debt</u>  <u>Book Equity</u>  <u>Market Equity</u>  <u>Operating Income</u>  <u>Interest Expense</u>

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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