Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long- term basis?
A)Ratio of fixed assets to long-term liabilities
B)Ratio of net sales to assets
C)Number of days' sales in receivables
D)Rate earned on stockholders' equity

Question

Quizplus · Accepted Answer

This ratio, also known as the fixed charge coverage ratio, measures the ability of the business to cover its fixed charges (i.e. principal and interest payments on long-term debt) with its fixed assets. A high ratio (typically above 2:1) suggests that the business has a strong ability to meet its long-term obligations and may be able to borrow additional funds on a long-term basis.

Which of the Following Ratios Provides a Solvency Measure That