Question

Debt management ratios

Companies use different sources for financing their assets—internal resources as well as external resources, and debt funding versus equity financing.

Aunt Dottie’s Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as:

A company with no leverage, or an unleveraged company

A company with leverage, or a leveraged company

Which of the following is true about the leveraging effect?

Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

Under economic growth conditions, firms with relatively low leverage will have higher expected returns.

Ratios that focus on the proportion of total assets financed by a firm’s creditors is referred to as   .

Influenced by a firm’s ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with     times-interest-earned ratios (TIE).

Answer 1

1. Aunt Dottie’s Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as -- A company with no leverage, or an unleveraged company

2. Which of the following is true about the leveraging effect?

Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

3. Ratios that focus on the proportion of total assets financed by a firm’s creditors are referred to as debt ratios particularly debt to asset ratio

4. Influenced by a firm’s ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with high times-interest-earned ratios (TIE)