Question

Big Valley has a times interest earned ratio that is _________, which indicates that Big Valley has _________ long-term insolvency risk than the typical firm in the industry.
a. 4; the same
b. 3.91; less
c. 3.91; more
d. 4.58; more
e. 4.58; less

Answer 1

Answer:

C. 3.91; more

Explanation:

the first part of the question is missing. It involved several aspects of Big Valley including its current and quick ratios, ROE and how they compare to the industry's average (they are generally lower than the industry's average).

This particular question refers to times interest earned ratio = EBIT / interest expense = 3.91, and how it compares to the industry's average (it is higher than the industry's average).

Since Big Valley performs poorly against the industry's average when comparing the other 3 metrics, but performs very well in the times interest ratio, it means that Big Valley has a low debt ratio. A low debt ratio results in lower financial leverage and lower interest expense.