The following table shows selected financial data for two (2) national specialty
ID: 2724915 • Letter: T
Question
The following table shows selected financial data for two (2) national specialty retailers (in $ millions):
Debt
BV Equity
MV Equity
EBIT
Interest Expense
Firm A
1,000
500
800
150
60
Firm B
140
40
60
20
15
a. Calculate the market debt-equity ratio for each firm.
b. Calculate the book-debt-equity ratio for each firm.
c. Calculate the interest coverage ratio for each firm.
d. Which is more useful or relevant: the book debt-equity ratio or the market debt-equity ratio? Discuss/explain.
Debt
BV Equity
MV Equity
EBIT
Interest Expense
Firm A
1,000
500
800
150
60
Firm B
140
40
60
20
15
Explanation / Answer
Firm A market debt -equity ratio = 1000/800= 1.25 book debt -equity ratio= 1000/500=2
Firm B market debt to equity ratio =140/60=2.33 book debt -equity ratio= 140/40=3.5
calculate interest coverage rate of firm A EBIT/interest expence 150/60=2.5
calculate interest coverage rate of firm B 20/15=1.33
market debt to equity ratio is more relevant because of deceptive depreciation methods of assets
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