Question

Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis?
a. ratio of fixed assets to long-term liabilities
b. ratio of net sales to assets
c. number of days' sales in receivables
d. rate earned on stockholders' equity

Answer 1

Answer:

a. ratio of fixed assets to long-term liabilities

Explanation:

As we know that

Margin of safety = Expected sales - break even sales

where,

Break even point = (Fixed expenses) ÷ (Profit volume Ratio)  

where,  

Contribution margin per unit = Selling price per unit - Variable expense per unit  

And, Profit volume ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100

And,

Expected sales = Selling price per unit × Unit sales per month

So to borrow additional fund on a long term basis, the ratio of fixed assets to long-term liabilities is required