When considering whether an earnings coverage ratio is acceptable, consideration is least likely to be given to:
A) earnings variability
B) earnings persistence
C) cash flow variability
D) dividend policy for common stock

Question

Quizplus · Accepted Answer

The earnings coverage ratio is a measure of a company's ability to service its debt obligations. The ratio compares the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) to its interest and principal payments. While dividend policy for common stock is important for shareholders, it is not directly relevant to the company's ability to service debt, and hence, not a consideration for the earnings coverage ratio. Earnings variability, earnings persistence, and cash flow variability are all important factors to evaluate the sustainability of the ratio.

When Considering Whether an Earnings Coverage Ratio Is Acceptable, Consideration