Debt management ratios measure the extent to which a firm uses financial leverag

Question

Debt management ratios measure the extent to which a firm uses financial leverage and the degree of safety afforded to ______creditorsanalystsshareholdersItem 1 . They include the: (1) Debt-to-assets ratio, (2) Times interest earned ratio (TIE), and (3) EBITDA coverage ratio. The first ratio analyzes debt by looking at the firm's____________cashflow statementincome statementbalance sheetItem 2 , while the last two ratios analyze debt by looking at the firm's_______cashflow statementincome statementbalance sheetItem 3 . The debt-to-total-assets ratio measures the percentage of funds provided by________debtholdersanalystsshareholdersItem 4 . Its equation is:

High debt ratios that exceed the industry average may make it costly for a firm to borrow additional funds without first raising more________debtpreferredequityItem 5 . The times interest earned ratio measures the extent to which_________totaloperatingnetItem 6 income can decline before the firm is unable to meet its annual_______depreciationrentinterestItem 7 payments. Its equation is:

EBIT is used as the numerator because________depreciationrentinterestItem 8 is paid with pretax dollars—the firm's ability to pay________depreciationrentinterestItem 9 is not affected by taxes. The EBITDA coverage ratio is:

This ratio is more complete than the TIE ratio because it recognizes that depreciation and amortization are not________deductiblecashrealItem 10 expenses, so these amounts are available to service debt, and lease payments and principal repayments are fixed payments.

Explanation / Answer

1. Creditors : Debt Management Ratio safeguards the interest of Creditors.

2. Balance Sheet Items : Both Debt and Asset is Balance Sheet Item.

3. Debt holders : It measures the percentage of Asset is financed by Debt olders.

4. Equity : Since Debt is availabe in market at higher rate than industry, it will add extra burden to the Interest. So it is better to finance from Equity Source.

5. Operating Income

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