When assessing the fixed-payment coverage ratio,
A) the lower its value the more risky is the firm.
B) the lower its value, the lower is the firm's financial leverage.
C) preferred stock dividend payments can be disregarded.
D) the higher its value, the higher is the firm's liquidity.

Question

Quizplus · Accepted Answer

The fixed-payment coverage ratio measures a company's ability to meet its fixed payment obligations (e.g. interest and principal payments on debt) with its available earnings. A lower value of this ratio indicates that the company has a higher risk of defaulting on its fixed payment obligations, making it a riskier investment.

When Assessing the Fixed-Payment Coverage Ratio