Question

Sunny Co has a debt-to-equity ratio of 1.00, compared to the industry average of 0.80. Its competitor Carter Co., however, has a debt-to-equity ratio of 1.50. Based on what debt-to-equity ratios imply, which of the following statements is true?
O Carter Co.'s creditors face lesser risk than the average financial risk in the industry.
O Sunny Co.'s shareholders expect magnified returns but higher risk as compared to Carter Co.
O Carter Co. has greater financial risk as compared to Sunny Co. and to the average financial risk in the industry.
O Carter Co. has higher creditworthiness as compared to Sunny Co.

Answer 1

Answer:

The answer is C.

Explanation:

Debt-to-equity ratio is an economical term that is used to express the balance between a companies total debt and its assets. It shows at what ratio the company's assets are funded by investors, stakeholders etc.

Since the industry average debt-to-equity ratio is 0.80 and the two companies have debt-to-equity ratios of 1.00 and 1.50 respectively, they are both over the average.

But with the higher ratio, Carter Co. has a higher financial risk compared to Sunny Co. and the industry average debt-to-equity ratio. So the correct answer is C.

I hope this answer helps.