Explanation:
Let's calculate the key ratios for both the company and industry average:
Interest Coverage Ratio (IC) = EBIT / Interest Expense
Debt-to-Equity Ratio (D/E) = Debt Market Value / Equity Market Value
Credit Rating Analysis:
According to the synthetic credit rating schedule:
Company Analysis:
Industry Average Analysis:
Comparison:
Therefore, the company achieves a higher rating based on IC and a lower rating based on D/E.
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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.
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