Which of the Following Statements Is an Accurate Interpretation of the Debt

question 3

Multiple Choice

Which of the following statements is an accurate interpretation of the debt ratio?

• A)A debt ratio above 1.00 is considered a good,safe ratio.
• B)A debt ratio of 2.0 indicates a very strong ability to pay liabilities.
• C)A debt ratio of 0.60 or lower is considered a high-risk ratio.
• D)A debt ratio of 0.60 or lower is a good,safe ratio.

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Definitions:

Strict Residual Dividend Policy

A dividend policy in which dividends are based on the earnings left over after all operating expenses, taxes, and project investments are covered.

Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends, calculated as dividends per share divided by earnings per share.

Clientele Effect

The attraction of companies with specific dividend policies to those investors whose needs are best served by those policies. Thus, companies with high dividends will have a clientele of investors with low marginal tax rates and strong desires for current income. Similarly, companies with low dividends will attract a clientele with little need for current income and who often have high marginal tax rates.

Investment Opportunities

Investment Opportunities refer to avenues or instruments that offer potential for financial return, such as stocks, bonds, real estate, or other assets.