Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?
A)Debt ratio and price-to-earnings ratio.
B)Cash flow adequacy and fixed charge coverage.
C)Days payable outstanding and gross profit margin.
D)Cash interest coverage and average collection period.

Question

Quizplus · Accepted Answer

The ratios that best measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges are the cash flow adequacy ratio and fixed charge coverage ratio. The debt ratio and price-to-earnings ratio only measure the level of debt and the firm's earnings potential. Days payable outstanding and gross profit margin don't specifically measure a firm's ability to cover interest and fixed charges. Cash interest coverage and average collection period only measure a firm's ability to cover interest and collect outstanding debts.

Which Ratios Measure the Extent of a Firm's Financing with Debt