Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?

a. Debt ratio and price-to-earnings ratio.

b. Cash flow adequacy and fixed charge coverage.

c. Days payable outstanding and gross profit margin.

d. Cash interest coverage and average collection period

Question

Business

Elisha Huang

10 January, 11:48

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?

a. Debt ratio and price-to-earnings ratio.

b. Cash flow adequacy and fixed charge coverage.

c. Days payable outstanding and gross profit margin.

d. Cash interest coverage and average collection period

+1

Answers (1)

Know the Answer?

Melody Hebert · Answer 1

The answer is B.

Explanation:

Cash flow adequacy ratio is used to determine if cash flows generated from operating activities in a period are enough to repay the amount used to borrow non-current assets when due. A cash flow of 1 or greater than 1 means that the business is able to pay its debt comfortably while cash flow less than 1 means there is difficulty.

Fixed charge ratio measures if a business is able to cover its fixed finance cost or fixed interest payment The formula is EBIT/interest payment.