Firm A has a total debt to total assets ratio of 50% and an interest coverage ratio of 1.0. Firm B has a total debt total assets ratio of 80% and an interest coverage ratio of 10.0. Based on this limited information firm ________ appears to be in ________ debt management position than firm ________.
A) A, better, B
B) B, better, A
C) A, a comparable, B
D) B, lesser, A

Question

Quizplus · Accepted Answer

Firm B has a higher interest coverage ratio than Firm A, indicating that it is better able to meet its interest payments with its earnings. Additionally, Firm A has a lower total debt to total assets ratio than Firm B, suggesting that it has less financial leverage. Therefore, Firm B appears to be in a better debt management position than Firm A.

Firm a Has a Total Debt to Total Assets Ratio