Question

Which one of the following statements is correct? Select one: a. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. b. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. c. The debt-equity ratio can be computed as 1 plus the equity multiplier. d. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. e. An increase in the depreciation expense will not affect the cash coverage ratio.

Answer 1

Answer:

Option E is correct

An increase in the depreciation expense will not affect the cash coverage ratio.

Explanation:

Option E is correct

An increase in the depreciation expense will not affect the cash coverage ratio.

Cash coverage ratio tells us if firm is capable of paying its current liabilities with the cash or cash equivalent. It can not allow other assets to be used for paying the current liabilities.

Formula for Cash Coverage ratio:

Cash Ratio=$\frac{Cash+\ Cash\ Equivalent}{Total\ current\ liabilities}$

So, Cash coverage ratio is independent of expenses whether it is a depreciation or some other expense.