A Times Interest Earned Ratio of 5 Indicates the Firm

question 11

Multiple Choice

A times interest earned ratio of 5 indicates the firm:

• A) pays 5 times its earnings in interest expense.
• B) earns significantly more than its interest obligations.
• C) has interest expense equal to 5% of EBIT.
• D) has a low tax liability.

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Definitions:

Framing Effect

The cognitive bias where people's decisions are influenced by the way information is presented, rather than just the information itself.

Representativeness Heuristic

A cognitive shortcut that involves making judgments based on how well something matches or represents a particular prototype.

Overconfidence

The tendency to be more confident in one's own abilities or outcomes than is objectively justified.

Availability Heuristic

A mental shortcut that relies on immediate examples that come to a person’s mind when evaluating a specific topic, concept, method, or decision.