(Assessing

leverage

use)

Some financial data for three corporations are displayed here.

MEASURE

FIRM A

FIRM B

FIRM C

INDUSTRY NORM

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Debt ratio

20%

25%

40%

20%

Times interest covered

8 times

10 times

7 times

9 times

Price/earnings ratio

9 times

11 times

6 times

10 times

a.Which firm appears to be excessively leveraged?

b.Which firm appears to be employing financial leverage to the most appropriate degree?

c.What explanation can you provide for the higher price/earnings ratio enjoyed by firm B as compared with firm A?

a.)Which firm appears to be excessively leveraged?(Select the best choice below.)

A.

Firm A

B.

Firm B

C.

Firm C

b.) Which firm appears to be employing financial leverage to the most appropriate degree?(Select the best choice below.)

A.

Firm A

B.

Firm B

C.

Firm C

c.) What explanation can you provide for the higher price-earnings ratio enjoyed by firm B as compared with firm A?(Select the best choice below.)

A.

Firm B employs financial leverage to the extremely high degree and investors must perceive it to have higher growth potential and/or lower risk compared to firm A.

B.

Firm B employs financial leverage to the lower than average degree and investors must perceive it to have lower growth potential and/or higher risk compared to firm A.

C.

Firm B employs financial leverage to the most appropriate degree and investors must perceive it to have higher growth potential and/or lower risk compared to firm A.

D.

Firm B employs financial leverage to the most appropriate degree and investors must perceive it to have lower growth potential and/or higher risk compared to firm A.