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?
A) Firm 1
B) Firm 2
C) Firm 3
D) Firm 4
Answer: D
Explanation: D) Everything else equal, a company places more burdens on its borrowing when it has a higher debt/equity ratio and lower earnings per share. Thus, Firm 4 is placing more burdens on its borrowing.
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