BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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True
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False
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Detailed explanation-1: -A company’s interest coverage ratio determines whether it can pay off its debts. The ratio is calculated by dividing EBIT by the company’s interest expense. A higher interest coverage ratio means a company is more poised it is to pay its debts while the opposite is true for lower ratios.
Detailed explanation-2: -A ratio of less than 1 indicates that the firm is struggling to generate enough cash to repay its interest obligations. A ratio below 1.5 indicates the company may not be able to pay its interest on the debt. Low ratio signifies a higher debt burden and a greater possibility of default or bankruptcy.
Detailed explanation-3: -The interest coverage ratio measures how many times a company can cover its current interest payment with its available earnings. In other words, it measures the margin of safety a company has for paying interest on its debt during a given period.
Detailed explanation-4: -A higher ratio indicates that there is more income available to pay for debt servicing.