Asked by Frasier Williamson on May 22, 2024
Verified
Which of the following is correct?
A) The times interest earned ratio is considered a better test of the ability to cover interest charges than the cash coverage ratio.
B) The debt-to-equity ratio shows the relative proportion of total assets financed by debt.
C) The higher the debt-to-equity ratio,the higher the potential return to the stockholders,but also the higher risk to stockholders.
D) The cash coverage ratio compares the cash generated by a company to its cash obligations for the prior period.
Debt-To-Equity Ratio
The debt-to-equity ratio is a measure of financial leverage, indicating the proportion of company financing that comes from creditors and investors, calculated as total liabilities divided by shareholders' equity.
Cash Coverage Ratio
This ratio measures a company's ability to cover its interest obligations with its cash flow, indicating financial health and risk.
Times Interest Earned Ratio
A financial metric used to measure a company's ability to meet its debt obligations, calculated by dividing earnings before interest and taxes (EBIT) by interest expenses.
- Analyze the profitability and financial leverage of a company by examining the return on equity (ROE) and the ratio of debt to equity.
Verified Answer
MG
Matthew GaudetteMay 25, 2024
Final Answer :
C
Explanation :
The debt-to-equity ratio indicates the balance between debt financing and equity financing used by a company. A higher ratio suggests that a company is taking on more debt, which can lead to higher returns for stockholders due to the leverage effect, but it also increases the financial risk if the company cannot meet its debt obligations.
Learning Objectives
- Analyze the profitability and financial leverage of a company by examining the return on equity (ROE) and the ratio of debt to equity.