Nelson Industries has a higher debt ratio than Butler,Inc.,and Nelson also has a higher times interest earned ratio than Butler.If Nelson and Butler both have the same amount of total assets,then
A) Nelson must have higher operating income than Butler.
B) if both companies have the same operating income, Butler must be paying a higher interest rate on its long-term debt than Nelson is paying.
C) Nelson may have more non-interest bearing liabilities, such as accounts payable, than Butler has.
D) if both companies have the same operating income, a mistake was made in the calculations because the company with a higher debt ratio must have a lower times interest earned ratio.

Question

Quizplus · Accepted Answer

A higher debt ratio means that Nelson has more debt compared to its total assets than Butler. However, Nelson also has a higher times interest earned ratio, which means that Nelson is able to cover its interest payments from its operating income more easily than Butler. This suggests that Nelson may have more non-interest bearing liabilities, such as accounts payable, which increases its current liabilities without affecting its interest payments or times interest earned ratio. Therefore, it is possible that Nelson has a higher debt ratio but a similar operating income compared to Butler, and C is the most likely explanation. A cannot be determined since information about operating income is not provided. B is not necessarily true, as interest rates on long-term debt depends on several factors, including credit ratings and market conditions. D is incorrect since a higher debt ratio does not necessarily mean a lower times interest earned ratio if the company is generating enough operating income to cover its interest payments.

Nelson Industries Has a Higher Debt Ratio Than Butler,Inc