Company a Has $45 Million Worth of Common Share Capital

Multiple Choice

Company A has $45 million worth of common share capital, $3.5 million in retained earnings, $30 million in long-term debt and $2.5 million in preferred shares. Company B has $22.5 million of common share capital, $3 million in retained earnings, $51 million in long-term debt and $4.5 million in preferred shares. If both companies face a tax rate of 32%, cost of common share capital of 11%, cost of debt capital of 8%, cost of preferred share capital of 9.5%, which company is more highly levered?

A) Company A with a leverage ratio that equals 40.1%
B) Company B with a leverage ratio that equals 68.5%
C) Company A with a leverage ratio that equals 8.9%
D) Company B with a leverage ratio that equals 7.4%
E) Company B with a leverage ratio that equals 71.2%