Attempts: Average: 13 5. More on debt management ratios The extent of financial
ID: 2617632 • Letter: A
Question
Attempts: Average: 13 5. More on debt management ratios The extent of financial leverage in a firm Debt rabios measure the proportion of total assets financed by a firm's creditors. Scorecard Corp. has a debt-to-equity ratio of 3.8o, compared to the industry average of 4.56. Its compet Corp., however, has a debt-to-equity ratio of 3.04. Based on what debt-to-equity ratios imply, which of th statements is true7 O Scorecard Corp. has higher creditworthiness as compared to Baker Corp O Baker Corp.'s creditors face higher risk than the average financial risk in the industry O scorecard Corp. has greater financial risk as compared to Baker Corp. but lower than the average fi in the industry O Baker Corp. has a greater risk of bankruptcy than Scorecard Corp. Suppose the stock price of scorecard Corp. falls by 10%, what impact will it have on its market-to-debt r nothing changes in the company's balance sheet? O The market debt ratio will decrease, reflecting a decrease in the financial risk of the company 0 The market debt ratio will increase, reflecting an increase in the financial risk of the company. O The market debt ratio will increase, reflecting a decrease in the financial risk of the company O The market debt ratio will decrease, reflecting an increase in the financial risk of the company Data Collected (Millions of dollars) Scorecard corp. reported the following figures in its annual report Year 1 $500 $50 $40 $23 Based on the information, Scorecard Corp. has the a to cover its fixid financial charges EBITDA Interest payments Principal payments Lease payments timesExplanation / Answer
Debt Equity Ratio of Scorecard Corp=3.80
Debt Equity ratio of Baker Corp=3.04
Both have lower than industry average debt equity ratio of 4.56
Both Face lower risk than industry average.Scorecard Corp faces higher risk than Baker Corp.
Hence,
Answer:
Scorecard Corp has greater financial risk as compared to Baker Corp but lower than the average financial risk in the industry
If Stock price fall by 10%, Market capitalization will decrease by 10%. The amount of debt will remain constant.
Market to Debt ratio will decrease.
Debt Equity ratio will increase
Risk will increase because of increase in Debt to Equity ratio
Answer:
The market to debt ratio will decrease reflecting an increase in the financial risk of the company
EBITDA=$500
Interest payment=$50
Principle payment=$40
Lease oayment==$23
Total fixed financial charges=$(50+40+23)=$113
Scorecard Corp has the earnings to cover fixed financial charges by (500/113)= 4.424779 times
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