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You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): Debt 僻燙11 78.9 Book Equity 295.5 343 Market Equity 397.1 41.9 Operating Income : Win A Firm B 49.9 7.4 8.5 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 ts debt obligations? a. What is the market debt-to-equity ratio of each firm? The market debt-to-equity ratio for Firm A is (Round to two decimal places.)

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Answer #1
Ratios Firm A Firm B
Market Debt to Equity 499.1/397.1 ~ 1.257 78.9/41.9 ~ 1.883
Book Debt to Equity 499.1/295.5 ~ 1.689 78.9/34.2 ~ 2.307
Interest Coverage Ratio 98.9/49.9 ~ 1.982 8.5/7.4 ~ 1.149

As firm B has a lower Debt to Equity Ratio (both market and book) and lower interest coverage ratio (Operating Income / Interest Expense), its ability to meet both long-term and short-term obligation is lower than that of firm A. Hence, Firm B will have greater difficulty in meeting its debt obligations.

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