The highest possible value for the interest-burden ratio is ________, and this occurs when the firm ________.
A) 0; uses as much debt as possible
B) 1; uses debt to the point where ROA = interest cost of debt
C) 1; uses no interest-bearing debt
D) -1; pays down its existing debts

Question

Quizplus · Accepted Answer

The highest possible value for the interest-burden ratio is 1, which occurs when the firm uses no interest-bearing debt. This is because the interest-burden ratio measures the proportion of earnings before taxes to earnings before interest and taxes (EBIT), and if there is no interest expense, the ratio is maximized at 1.

The Highest Possible Value for the Interest-Burden Ratio Is ________