Question

	Schand Manufacturing				Apparel Industry
	2018	2017	2016		2018	2017	2016
Interest Cash Coverage	7.0	6.5	4.8		9.0	8.5	8.0
Interest Coverage (TIE) Ratio	6.1	5.9	3.2		8.5	7.9	7.4
Debt/Assets Ratio	0.4	0.5	0.6		0.3	0.4	0.5
Debt/Equity Ratio	0.9	1.0	1.2		0.4	0.7	1.0
Schand’s use of leverage to fund assets and operations is: a. Increasing over time and creditors view this unfavorably because it signals more risk b. Decreasing over time and the company is outperforming other companies in its industry c. Decreasing over time and creditors view this favorably because it signals decreasing risk d. It is always unfavorable for companies to use debt to finance operations and expansion e. None of the above are correct
Schand’s Debt/Equity is: a. A decreasing number over time indicating less risk and greater ability to cover long-term debts b. Indicating the company utilizes outside funding to support its operations c. Improving over time but still carries more risk than other companies in the same industry d. Trending in the same direction as the debt-to-assets ratio e. All of the above are correct

Answer 1

1. Answer is option C

Decreasing over time and creditors view this favorably because it signals decreasing risk.

Explanation : leverage is important but upto certain extent beyond it carries risk. Schand was highly levered by gradually it is decreasing its level.

2. Answer is option E

All of the above are correct

Explanation

the debt equity ratio is 0.9. thus it is clear it has proportion of debt in the capital structure. Debt equity ratio of the company is decreasing over the period i.e. It was 1.0 in 2017 but reduced to 0.9 in 2018 but compared to other companies in the industry it is still very high. The same trend can be observed in the company's debt-to-assets ratio, Moreover, the decrease in debt/equity ratio decreases the credit risk.