Financial information for two companies competing in the cosmetics industry long dash The Estee Lauder Company and e$.$l$.$f$.$ Beauty Inc.long dashappears in the table below. All dollar values are in thousands.

$($Click the icon here in order to copy the contents of the data table below into a$$ spreadsheet.$)$

Estee Lauder

e$.$l$.$f$.$ Beauty

Total assets

$$$$9$ comma $223$ comma $400$

$$$$414$ comma $829$

Total liabilities

$5$ comma $635$ comma $900$

$273$ comma $867$

EBIT

$1$ comma $625$ comma $800$

$25$ comma $995$

Interest expense

$70$ comma $900$

$16$ comma $283$

a$.$ Calculate the debt ratio and the times interest earned ratio for each company. In what way are these companies similar in terms of their debt$$ usage, and in what way are they very$$ different?

b$.$ Calculate the ratio of interest expense to total liabilities for each company.$$ Conceptually, what do you think this ratio is trying to$$ measure? Why are the values of this ratio dramatically different for these two$$ firms? Suggest some reasons.

Question content area bottom

Part $1$

a$.$ The debt ratio for Estee Lauder is

$$

enter your response here. $($Enter in decimal format and round to three decimal$$ places.$)$

Part $2$

The debt ratio for e$.$l$.$f$.$ Beauty is

$$

enter your response here. $($Enter in decimal format and round to three decimal$$ places.$)$

Part $3$

The times interest earned ratio for Estee Lauder is

$$

enter your response here. $($Round to three decimal$$ places.$)$

Part $4$

The times interest earned ratio for e$.$l$.$f$.$ Beauty is

$$

enter your response here. $($Round to three decimal$$ places.$)$

Part $5$

In what way are these companies similar in terms of their debt$$ usage, and in what way are they very$$ different?$($Select the best answer$$ below.$)$

A$.$

The two companies are similar in the proportion of total liabilities financed by the$$ firm's creditors, as shown by their similar debt ratios of $0\mathrm{.}611$ and $0\mathrm{.}66.$ The difference is in each$$ firm's ability to make monthly dividend$$ payments, as measured by the times interest earned ratio. The higher the$$ number, the better able the firm is to fulfill its obligations. In this$$ case, Estee$$ Lauder's times interest earned ratio of $22\mathrm{.}931$ indicates they are significantly more able to fulfill their dividend obligations than e$.$l$.$f$.$ Beauty, whose times interest earned ratio is $1\mathrm{.}596.$

B$.$

The two companies are similar in the proportion of total assets financed by the$$ firm's creditors, as shown by their similar debt ratios of $0\mathrm{.}611$ and $0\mathrm{.}66.$ The difference is in each$$ firm's ability to make contractual interest$$ payments, as measured by the times interest earned ratio. The lower the$$ number, the better able the firm is to fulfill its interest obligations. In this$$ case, Estee$$ Lauder's times interest earned ratio of $22\mathrm{.}931$ indicates they are significantly less able to fulfill their interest obligations than e$.$l$.$f$.$ Beauty, whose times interest earned ratio is $1\mathrm{.}596.$

C$.$

The two companies are similar in the proportion of total assets financed by the$$ firm's creditors, as shown by their similar times interest earned ratios of $0\mathrm{.}611$ and $0\mathrm{.}66.$ The difference is in each$$ firm's ability to make contractual interest$$ payments, as measured by the debt ratio. The higher the$$ number, the better able the firm is to fulfill its interest obligations. In this$$ case, Estee$$ Lauder's debt ratio of $22\mathrm{.}931$ indicates they are significantly more able to fulfill their interest obligations than e$.$l$.$f$.$ Beauty, whose debt ratio is $1\mathrm{.}596.$

D$.$

The two companies are similar in the proportion of total assets financed by the$$ firm's creditors, as shown by their similar debt ratios of $0\mathrm{.}611$ and $0\mathrm{.}66.$ The difference is in each$$ firm's ability to make contractual interest$$ payments, as measured by the times interest earned ratio. The higher the$$ number, the better able the firm is to fulfill its interest obligations. In this$$ case, Estee$$ Lauder's times interest earned ratio of $22\mathrm{.}931$ indicates they are significantly more able to fulfill their interest obligations than e$.$l$.$f$.$ Beauty, whose times interest earned ratio is $1\mathrm{.}596.$

Part $6$

b$.$ The ratio of interest expense to total liabilities for Estee Lauder is

$$

enter your response here. $($Round to three decimal$$ places.$)$

Part $7$

The ratio of interest expense to total liabilities for e$.$l$.$f$.$ Beauty is

$$

enter your response here. $($Round to three decimal$$ places.$)$

Part $8$

$$Conceptually$,$ what do you think this ratio is trying to$$ measure? Why are the values of this ratio dramatically different for these two$$ firms?$($Select the best answer$$ below.$)$

A$.$

This ratio is trying to measure the interest rate that each firm is paying on its total liabilities. The difference in the ratios for the two firms indicates the level of risk associated with Estee Lauder is higher than the level of risk associated with e$.$l$.$f$.$ Beauty. Higher risk allows a firm to receive lower interest rates.

B$.$

This ratio is trying to measure the interest rate that each firm is paying on its total liabilities. The difference in the ratios for the two firms indicates the level of risk