19.2.2. Solvency Ratios (Leverage Ratios)

Try these first

1. 1.

   What is the Debt-to-Equity ratio if total debt is $500,000 and shareholders' equity is$250,000?

   Hint

   Total debt divided by shareholders' equity.

2. 2.

   If a company has EBIT of $60,000 and interest expense of$10,000, what is the Interest Coverage ratio?

   Hint

   EBIT divided by interest expense.

3. 3.

   What does a high Debt-to-Equity ratio indicate?

   • Low financial risk
   • High financial leverage
   • Low debt

   Hint

   Think about how debt impacts financial stability.

4. 4.

   True or False: A higher Interest Coverage ratio suggests a company has a better ability to meet its debt obligations.

   • True
   • False

   Hint

   Consider how EBIT relates to interest expenses.

5. 5.

   A tech startup has $600,000 in total debt and$200,000 in equity. What is their Debt-to-Equity ratio, and what does this imply about their financial leverage?

   Hint

   Calculate total debt divided by equity.

6. 6.

   If a firm has an EBIT of $250,000 and interest expenses of$75,000, calculate the Interest Coverage ratio and discuss its potential implications for investors.

   Hint

   Divide EBIT by interest expenses for the ratio.