Question: You are analyzing the leverage of two firms and you noted the following (all values in millions of dollars).
Debt Book Equity Market Equity Operating Income Interest Expense
Firm A 65 75 80 45 12
Firm B 60 40 50 22 10
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 cover ratio of each firm?
d) Based on your calculations above, which of the following statement is most correct about firms A and B? (2 points)
i. Firm A is most likely to default on its debt
ii. Firm B is most likely to default on its debt.
iii. Lenders are more likely to favor Firm B.
iv. Lenders are more likely to favor Firm A.