Question: ( Assesing leverage use ) Some financial data and the appropriate industry norm for three companies are shown in the following table: MEASURE FIRM X

(Assesing leverage use) Some financial data and the appropriate industry norm for three companies are shown in the following table:

MEASURE FIRM X FIRM Y FIRM Z INDUSTRY NORM

Total debt to total assets 20% 30% 10% 30%

Times interest and preferred dividend

coverage 8 times 16 times 19 times 8 times

Price/earnings ratio 9 times 11 times 9 times 9 times

  1. Which firm appears to be employing financial leverage to the most appropriate degree?
  2. In this situation, which "financial leverage effect" appears to dominate the market valuation process?

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