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Answer: Lower rating based on IC and a higher rating based on D/E.
## Explanation Let's calculate both metrics for the company and industry average: ### Interest Coverage Ratio (IC) IC = EBIT / Interest Expense **Company:** - EBIT = $9 million - Interest Expense = $2 million - IC = 9 / 2 = 4.5 **Industry Average:** - EBIT = $90 million - Interest Expense = $24 million - IC = 90 / 24 = 3.75 ### Debt-to-Equity Ratio (D/E) D/E = Debt Market Value / Equity Market Value **Company:** - Debt Market Value = $45 million - Equity Market Value = $80 million - D/E = 45 / 80 = 0.5625 or 56.25% **Industry Average:** - Debt Market Value = $360 million - Equity Market Value = $900 million - D/E = 360 / 900 = 0.40 or 40% ### Credit Rating Analysis **Interest Coverage (IC):** - Company IC = 4.5 (falls in A rating range: 4 < IC < 5) - Industry IC = 3.75 (falls in BBB rating range: 3 < IC < 4) - **Company has HIGHER rating than industry based on IC** **Debt-to-Equity (D/E):** - Company D/E = 56.25% (falls in BBB rating range: 45% < D/E < 60%) - Industry D/E = 40% (falls in A rating range: 30% < D/E < 45%) - **Company has LOWER rating than industry based on D/E** Therefore, the company achieves: - **Higher rating based on IC** - **Lower rating based on D/E** This corresponds to **Option B**.
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| Metric | Company | Industry Average |
|---|---|---|
| EBIT | 9 | 90 |
| Equity market value | 80 | 900 |
| Debt market value | 45 | 360 |
| Interest expense | 2 | 24 |
A synthetic credit rating schedule indicates:
| Credit Rating A | Credit Rating BBB |
|---|---|
| Interest rate coverage (IC) | 4 < IC < 5 |
| Debt-to-equity ratio (D/E) | 30% < D/E < 45% |
Based on this schedule, comparing credit ratings for the company and industry averages suggests that the company achieves:
A
Lower rating based on IC and a higher rating based on D/E.
B
Higher rating based on IC and a lower rating based on D/E.
C
Higher rating based on both IC and D/E.