Why Would a High Debt Ratio Be a Red Flag

question 115

Multiple Choice

Why would a high debt ratio be a red flag in a financial statement analysis?

• A)The company is borrowing more than it is earning.
• B)The company may be unable to pay its debts.
• C)The company is paying too much interest.
• D)Both A and B are reasons why it would be a red flag.

Understand the basics of hypothesis testing, including reading t and z statistics from tables.

Identify and interpret Type I and Type II errors in hypothesis testing.

Determine the correct hypothesis setup for given scenarios.

Recognize the relationship between the level of significance (α), p-values, and the decision to reject or fail to reject the null hypothesis.

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Definitions:

Face Value

The nominal or dollar value printed on a financial instrument, such as a bond or stock certificate.

Premium

The amount paid for an insurance policy or the amount by which a bond or stock sells above its par value.

Straight-Line Amortization

A method of calculating equal amortization payments over an asset's useful life or a loan's term.

Interest Expense

The cost incurred by an entity for borrowed funds; this expense is reported on the income statement during the period in which the borrowing occurs.