The debt-to-equity ratios for Firm 1,Firm 2,Firm 3,and Firm 4 are 0.2,0.3,0.35,and 0.4,respectively.The earnings per share for Firm 1,Firm 2,Firm 3,and Firm 4 are $4,$3,$2.5,and $2,respectively.Everything else equal,which firm is placing more burdens on its borrowing?

Question

Quizplus · Accepted Answer

The higher the debt-to-equity ratio, the more a firm relies on borrowing to finance its operations. As Firm 4 has the highest debt-to-equity ratio, it places the most burden on borrowing. The earnings per share are not relevant to the level of burden on borrowing.

The Debt-To-Equity Ratios for Firm 1,Firm 2,Firm 3,and Firm 4