To evaluate a firm's debt capacity effectively, the analyst should construct both the debt ratio and the debt to equity ratio, because they are mutually exclusive indicators of the firm's capacity to assume additional debt.

Question

Quizplus · Accepted Answer

The statement is incorrect. The debt ratio and the debt to equity ratio are not mutually exclusive indicators of a firm's debt capacity. In fact, they both provide different perspectives on the firm's capital structure and level of leverage. Other factors, such as the interest coverage ratio and the free cash flow to debt ratio, should also be considered when evaluating a firm's debt capacity.

To Evaluate a Firm's Debt Capacity Effectively, the Analyst Should