The Lower the Debt Ratio

question 10

Multiple Choice

The lower the debt ratio:

• A)the harder it is for the business to borrow funds to carry it through a short-term cash shortage
• B)the easier it is for the business to borrow funds to carry it through a short-term cash shortage
• C)the more financially stable the business is
• D)the higher its interest payments are likely to be

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Definitions:

Payback Period

The length of time required for an investment to recover its initial outlay in net cash inflows, an important metric in capital budgeting.

Time Value Of Money

A financial principle stating the value of money is time-dependent, where a dollar today is worth more than a dollar in the future due to its potential earning capacity.

Discount Rate

The rate of interest that is employed in discounted cash flow calculations to assess the present-day worth of cash flows that are expected to occur in the future.

Overhaul Costs

Expenses incurred for significant repairs or major restoration of equipment, machinery, or buildings which extend their life but do not qualify as capital expenses.