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?

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.