Quiz 4/9

Question

Firm A Firm B
Debt Ratio 0.3 0.7
TIER 2 5

Which firm would you rather lend to and why?

Answer

It depends. Firm A has a low debt ratio, and therefore has a larger percentage of its asset base available to cover the loan. On the other hand, Firm B is highly leveraged, but has a higher TIER, indicating a more efficient use of debt to generate revenues. In order to best evaluate this, more information about the industry is needed. For example, Firm A's structure is typical for a developer or builder with large capital assets and a long operating cycle. Firm B's structure is more typical for a consultant who has limited capital assets, but generates high revenues from those assets.

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