Owners of bonds would prefer
1. a debt ratio of 60 percent to a debt ratio of 40 percent
2. a debt ratio of 40 percent to a debt ratio of 60 percent
3. a times-interest-earned of 5.1 to a times-interest-earned of 3.9
4. a times-interest-earned of 3.9 to a times-interest-earned of 5.1
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question

Quizplus · Accepted Answer

Owners of bonds would prefer a lower debt ratio because it indicates a lower level of debt relative to the company's assets, suggesting a lower risk of default. They would also prefer a higher times-interest-earned ratio as it indicates the company is more capable of meeting its interest obligations from its earnings, which again suggests lower risk.

Owners of Bonds Would Prefer