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Answer: Higher rating based on IC and a lower rating based on D/E.
## Explanation Let's calculate the key ratios for both the company and industry average: **Interest Coverage Ratio (IC) = EBIT / Interest Expense** - **Company**: IC = 9 / 2 = 4.5 - **Industry Average**: IC = 90 / 24 = 3.75 **Debt-to-Equity Ratio (D/E) = Debt Market Value / Equity Market Value** - **Company**: D/E = 45 / 80 = 56.25% - **Industry Average**: D/E = 360 / 900 = 40% **Credit Rating Analysis:** According to the synthetic credit rating schedule: - **Rating A**: 4 < IC < 5 and 30% < D/E < 45% - **Rating BBB**: 3 < IC < 4 and 45% < D/E < 60% **Company Analysis:** - IC = 4.5 → falls in Rating A range (4 < 4.5 < 5) - D/E = 56.25% → falls in Rating BBB range (45% < 56.25% < 60%) **Industry Average Analysis:** - IC = 3.75 → falls in Rating BBB range (3 < 3.75 < 4) - D/E = 40% → falls in Rating A range (30% < 40% < 45%) **Comparison:** - **Based on IC**: Company (4.5) > Industry (3.75) → Company has higher rating - **Based on D/E**: Company (56.25%) > Industry (40%) → Company has lower rating Therefore, the company achieves a **higher rating based on IC and a lower rating based on D/E**.
Author: LeetQuiz Editorial Team
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An investor compares a company versus its industry average, using the following data (in $ millions):
| 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:
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.