Home Calibri Paste 12. Which of the following is/are helpful for evaluating the

Question

Home Calibri Paste 12. Which of the following is/are helpful for evaluating the offect of leverage on a company's risk and potential retuns? L. Estimated pro forma coverage ratios lt. The recognition that financing decisions do not affect firm or shareholder value ill A range of earnings chart and proximity of expected EBIT to the breakeven value A conservative debt policy that obviates the need to evaluate risk A. I only B. Ill only C. I and Ili only D. Il and Ill only E. IV only F. None of the above. 4of9 1449 words Focus SEP

Explanation / Answer

We are evaluating the effect of leverage or debt on a company's risk and potential returns. Options II and IV will not help in this case as they would remove the the need for evaluating the risk relating to this financing decision (increase or decrease leverage).

Option I and III would help in evaluating the risk due to leverage effect as they involve coverage ratios such as interest coverage ratio, debt coverage ratio etc, and the proximity or how close is the EBIT to the breakeven level.

Correct option - C

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