A Company That Earns a Rate of Return on Its

question 50

Multiple Choice

A company that earns a rate of return on its investments lower than the interest rate on its debt is said to have

• A) unfavorable financial leverage.
• B) a sub-optimal capital structure.
• C) favorable financial leverage.
• D) negative financial leverage.

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Definitions:

Inventories

Items such as goods or merchandise held by a company, intended for sale or production.

Debt Ratio

A financial ratio that measures the extent of a company's leverage, calculated by dividing its total liabilities by its total assets.

TIE Ratio

The Times Interest Earned (TIE) ratio is a financial metric used to measure a company's ability to meet its debt obligations, calculated by dividing earnings before interest and taxes (EBIT) by interest expenses.

Profit Margin

A financial metric that measures the amount of net income earned with each dollar of sales generated by comparing the net income and the revenue of a company.