An acquirer will be more likely to finance a takeover using borrowed funds if
A) Its debt to equity ratio is increasing in the future
B) Its interest coverage ratio is decreasing in the future
C) Its interest coverage ratio is increasing and debt to equity ratio is decreasing in the future
D) Its interest coverage ratio is decreasing and debt to equity ratio is decreasing in the future
E) Its interest coverage ratio is increasing and debt to equity ratio is increasing in the future

Question

An acquirer will be more likely to finance a takeover using borrowed funds if
A) Its debt to equity ratio is increasing in the future
B) Its interest coverage ratio is decreasing in the future
C) Its interest coverage ratio is increasing and debt to equity ratio is decreasing in the future 
D) Its interest coverage ratio is decreasing and debt to equity ratio is decreasing in the future
E) Its interest coverage ratio is increasing and debt to equity ratio is increasing in the future

Quizplus · Accepted Answer

An acquirer will be more likely to finance a takeover using borrowed funds if its interest coverage ratio is increasing and debt to equity ratio is decreasing in the future. This means that the company will have a better ability to pay off its debt, as its interest coverage ratio is increasing. At the same time, the company is reducing its reliance on debt and increasing its equity, which is a positive sign for lenders. A decreasing debt to equity ratio indicates that the company is becoming less reliant on debt financing, which reduces the risk for lenders. Therefore, combination of these two factors makes it more attractive for lenders to finance a takeover using borrowed funds.

An Acquirer Will Be More Likely to Finance a Takeover