Some financial data for three corporations are displayed below:
Firm A:
Debt-to-equity ratio - 35%
Interest coverage ratio - 9 times
Price/Earnings ratio - 10 times
Firm B:
Debt-to-equity ratio - 40%
Interest coverage ratio - 11 times
Price/Earnings ratio - 12 times
Firm C:
Debt-to-equity ratio - 45%
Interest coverage ratio - 6 times
Price/Earnings ratio - 5 times
Industry Average:
Debt-to-equity ratio - 35%
Interest coverage ratio - 9 times
Price/Earnings ratio - 10 times
1. Which firm appears to be excessively leveraged?
2. Which firm seems to be employing financial leverage to the most appropriate degree?
3. How do you explain the higher P/E ratio enjoyed by firm B as compared to firm A.