Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis?
A) ratio of fixed assets to long-term liabilities
B) ratio of net sales to assets
C) number of days' sales in receivables
D) rate earned on stockholders' equity

Question

Quizplus · Accepted Answer

The ratio of fixed assets to long-term liabilities, also called the fixed charge coverage ratio, measures the ability of a company to meet its long-term obligations through the income generated by its fixed assets. This ratio is important for bondholders as it shows the margin of safety they have in the event of a default. A higher ratio indicates more security for bondholders and a better ability of the business to borrow additional funds on a long-term basis.

Which of the Following Ratios Provides a Solvency Measure That