Which of the following ratios provides a solvency measure that shows the margin of safety of 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) asset turnover ratio
C) number of days' sales in receivables
D) return on stockholders' equity

Question

Quizplus · Accepted Answer

The ratio of fixed assets to long-term liabilities, also known as the fixed charge coverage ratio, provides a solvency measure that shows the margin of safety of bondholders. It indicates whether a company has enough fixed assets to cover its long-term debt obligations. Additionally, this ratio gives an indication of the potential ability of the business to borrow additional funds on a long-term basis. A high fixed charge coverage ratio indicates that the company is less risky and can borrow more funds on a long-term basis.

Which of the Following Ratios Provides a Solvency Measure That