What Best Explains Why a Firm's Ratio of Long-Term Debt/total

question 83

Multiple Choice

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is higher than the industry average?

• A) The firm pays lower interest on long-term debt than the average firm.
• B) The firm has more short-term debt than average.
• C) The firm has a high ratio of current assets/current liabilities.
• D) The firm has a high ratio of total cash flow/long term debt.
• E) None of the options are correct.

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Definitions:

Fixed Costs

Expenses that do not change with the level of goods or services produced by a business, such as rent, salaries, or loan payments.

Units

In the context of inventory or production, refers to the individual items or components that can be counted or measured.

Break-Even Point

The point at which total costs and total revenue are equal, meaning no net loss or gain, and the business is breaking even.

Contribution Margin

The contribution margin represents the portion of sales revenue that is not consumed by variable costs and can contribute to covering fixed costs and generating profit.