A fi nancial analyst for Quality Investments, a diversifi ed investment fund, has gathered the following information for the years 2008 and 2009 on two fi rms—A and B—that it is considering adding to...

A fi nancial analyst for Quality Investments, a diversifi ed investment fund, has gathered the following information for the years 2008 and 2009 on two fi rms—A and B—that it is considering adding to its portfolio. Of particular concern are the operating and fi nancial risks of each fi rm. 2008 2009 Firm A Firm B Firm A Firm B Sales ($ million) 10.7 13.9 11.6 14.6 EBIT ($ million) 5.7 7.4 6.2 8.1 Assets ($ million) 10.7 15.6 Debt ($ million) 5.8 9.3 Interest ($ million) 0.6 1.0 Equity ($ million) 4.9 6.3 a. Use the data provided to assess the operating leverage of each fi rm (using 2008 as the point of reference). Which fi rm has more operating leverage? b. Use the data provided to assess each fi rm’s ROE (Cash to equity/Equity), assuming the fi rm’s Return on Assets is 10 percent and 20 percent in each case. Which fi rm has more fi nancial leverage? c. Use your fi ndings in parts (a) and (b) to compare and contrast the operating and fi nancial risks of Firms A and B. Which fi rm is more risky? Explain.