EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 2, Problem 36P
You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):
- 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 EBIT/interest coverage ratio of each firm?
- d. Which firm may have more difficulty meeting its debt obligations? Explain.
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You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):
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 its debt obligations?
a. What is the market debt-to-equity ratio of each firm?
The market debt-to-equity ratio for Firm A is enter your response here
. (Round to two decimal places.)
Part 2
The market debt-to-equity ratio for Firm B is enter your response here
. (Round to two decimal places.)
Part 3
b. What is the book debt-to-equity ratio of each firm?
The book debt-to-equity ratio for Firm A is enter your response here
. (Round to two decimal places.)
The book debt-to-equity ratio for Firm B is enter your response here
. (Round to two decimal places.)
Part 5
c. What is the interest coverage ratio of each firm?
The interest coverage ratio for Firm A is enter…
a. Explain how do analysts use ratios to analyse a firm’s leverage? Which ratios convey more important information to a credit analyst those revolving around the levels of indebtedness or those measuring the ability to service debt? What is the relationship between a firm’s level of indebtedness and risk? What must happen in order for an increase in leverage to be successful? Discuss and illustrate all your answer.
Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16, as you think about 4-17.)
a. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will raise the firm'
expected return on common equity (ROE).
b. The higher its tax rate, the lower a firm's BEP ratio will be, other things held constant.
c. The higher the interest rate on its debt, the lower a firm's BEP ratio will be, other things held constant.
d. The higher its debt ratio, the lower a firm's BEP ratio will be, other things held constant.
e. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will decrease the
firm's expected return on common equity (ROE).
Chapter 2 Solutions
EBK CORPORATE FINANCE
Ch. 2.1 - Prob. 1CCCh. 2.1 - Prob. 2CCCh. 2.2 - Prob. 1CCCh. 2.2 - Prob. 2CCCh. 2.2 - Prob. 3CCCh. 2.3 - What it is the difference between a firms gross...Ch. 2.3 - What is the diluted earnings per share?Ch. 2.4 - Prob. 1CCCh. 2.4 - Prob. 2CCCh. 2.5 - Prob. 1CC
Ch. 2.5 - Prob. 2CCCh. 2.6 - Why is EBITDA used to assess a firms ability to...Ch. 2.6 - Prob. 2CCCh. 2.6 - Prob. 3CCCh. 2.6 - Prob. 4CCCh. 2.7 - Describe the transactions Enron used to increase...Ch. 2.7 - Prob. 2CCCh. 2 - Prob. 1PCh. 2 - Prob. 2PCh. 2 - Consider the following potential events that might...Ch. 2 - What was the change m Global Conglomerates book...Ch. 2 - Find online the annual 10-K report for Costco...Ch. 2 - In early 2012, General Electric (GE) had a book...Ch. 2 - In early-2015, Abercrombie Fitch (ANF) had a book...Ch. 2 - Prob. 10PCh. 2 - Suppose that in 2016, Global launches an...Ch. 2 - Find online the annual 10-K report for Costco...Ch. 2 - Prob. 13PCh. 2 - Prob. 14PCh. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - Suppose a firms tax rate is 35%. a. What effect...Ch. 2 - Prob. 18PCh. 2 - Prob. 19PCh. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - Prob. 22PCh. 2 - Can a firm with positive net income run out of...Ch. 2 - Suppose your firm receives a 5 million order on...Ch. 2 - Nokela Industries purchases a 40 million...Ch. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - Find online the annual 10-K report for Costco...Ch. 2 - Prob. 28PCh. 2 - For fiscal year end 2015, Wal-Mart Stores, Inc....Ch. 2 - Prob. 30PCh. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - See Table 2.5 showing financial statement data and...Ch. 2 - Use the data in Problem 8 to determine the change,...Ch. 2 - You are analyzing the leverage of two firms and...Ch. 2 - Prob. 37PCh. 2 - Prob. 38PCh. 2 - Prob. 39PCh. 2 - Prob. 40PCh. 2 - Prob. 41PCh. 2 - Prob. 42PCh. 2 - Consider a retailing firm with a net profit margin...Ch. 2 - Prob. 44PCh. 2 - Prob. 45P
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- Calculate the projected debt ratio, debt-to-equity ratio, liabilities-to-assets ratio, times-interest-earned ratio, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?arrow_forwardIs the debt level that maximizes a firm's expected EPS the same as the one that maximizes its stock price? Explain. Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?arrow_forwardWhich of the following businesses are most exposed to interest rate risk? * A. A company with a high equity to debt ratio B. A company with a large amount of floating rate debt C. An al-equity company D. An investment company with an investment portfolio that matches its investment horizon.arrow_forward
- 1. From the scenario, Identify what is the Market value of the firm's equity, the market value of the firm's debt, the cost of equity (required rate of return), cost of debt (yield to maturity on existing debt) and the corporate tax rate.arrow_forwardWhich one of the following factors would likely cause a firm to increase its use of debt financing as measured by the debt to total capital ratio? A.Increased economic uncertainty. B.An increase in the degree of operating leverage. C.An increase in the corporate income tax rate. D.An increase in the price-earnings ratio.arrow_forwardBased on these calculations, which company appears to be more risky and which company appears to be more profitable? How can you tell? (Keep in mind that the current ratio and debt to equity ratio are "risk ratios" and the gross profit ratio and return on equity ratio are "profitability ratios").arrow_forward
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