Question

Debt management ratios measure the extent to which a firm uses financial leverage and the degree of safety afforded to . They include the: (1) Debt-to-capital ratio, (2) Times interest earned ratio (TIE), and (3) EBITDA coverage ratio. The first ratio analyzes debt by looking at the firm's , while the last two ratios analyze debt by looking at the firm's . The debt-to-capital ratio measures the percentage of funds provided by . Its equation is: High debt ratios that exceed the industry average may make it costly for a firm to borrow additional funds without first raising more . The times interest earned ratio measures the extent to which income can decline before the firm is unable to meet its annual payments. Its equation is: EBIT is used as the numerator because is paid with pretax dollars—the firm's ability to pay is not affected by taxes. The EBITDA coverage ratio is: This ratio is more complete than the TIE ratio because it recognizes that depreciation and amortization are not expenses, so these amounts are available to service debt, and lease payments and principal repayments are fixed payments.

Answer 1

Answer:

The 1st ratio examines debt by observing at the company's balance sheet, whereas the other two ratios examine debt by observing at the company's income statement. Thus, debt-to-total-assets ratio processes the %age of assets delivered by debt in order to fund total assets. The computed equation will be: (Total long term debt + Total short term debt) / Total assets). The high debt ratios that overdo the business average might create it expensive for a company to borrow the extra funds without initial raising for more equity. The period’s interest received ratio processes the degree to which the income can fall before the company is incapable to meet its yearly interest expense expenditures. However, the computed equation is EBIT / total interest payable: EBIT is used as the numerator as it is funded with pretax dollars.  The company’s capability to pay will not be affected by the taxes. The EBITDA analysis ratio is EBITDA / total interest: This proportion is more comprehensive than the TIE proportion because it identifies that depreciation and payback are not expenses, so these aggregates are accessible to service debt, and lease expenses and principal refunds are fixed expenses.