Question

Generally, low-leveraged industries have low coverage ratios, whereas capital-intensive industries that are heavily financed with debt have high coverage ratios. True or false?

Other things held constant, the higher a firm's financial leverage, the higher its business risk. True or false?

Interest is a tax deductible expense, and deductions are most valuable to firms with high tax rates. Therefore, the higher a firm's tax rate, the greater the advantage of debt. True or false?

Answer 1

False. Coverage ratios are inversely related to interest payments, lease payment etc. So, if their is more debt, their will be more interest payments which will reduce the coverage ratio, Therefore, low leveraged industries have high coverage ratio.

False. Business risk is affected by operating leverage rather than financial leverage

True. Debt comes with tax shield benefits as it reduces the amount of taxable income. Hence, more tax rate will give more advantage of debt borrowed.