Q25. Which of the following is NOT a means of determining whether a firm is able to pay its obligations as they come due?

A)   Acid-test ratio.

B)   Working capital.

C)   Profit margin.

Q26. Which ratio group measures the firm’s ability to manage the additional risk associated with increased borrowing?

A)   Capitalization ratios.

B)   Coverage ratios.

C)   Short-term solvency ratios.

Q27. Which of the following ratios is NOT used to assess the adequacy of cash flows generated through earnings that can be used to meet debt and lease obligations?

A)   Earnings before interest and taxes (EBIT) interest coverage ratio.

B)   Total debt to capitalization ratio.

C)   Funds from operations/total debt ratio.

Q28. Which ratio group measures the firm's ability to generate enough cash flow through its earnings to meet its debt and lease obligations?

A)   Profitability ratios.

B)   Short-term solvency ratios.

C)   Coverage ratios.

Q29. The use of coverage ratios when assessing a firm's ability to repay its debt is most likely to be focused on which of the following?

A)   The availability of liquid assets to meet short-term obligations.

B)   An examination of the adequacy of cash flows generated through earnings to meet debt obligations.

C)   An examination of additional risk associated with increased borrowing.

Q25. Which of the following is NOT a means of determining whether a firm is able to pay its obligations as they come due?fficeffice" />

A)   Acid-test ratio.

B)   Working capital.

C)   Profit margin.

Correct answer is C)       

Adequate working capital is important in meeting current liabilities. Two ratios that help assess working capital are the acid-test ratio and the current ratio.

Q26. Which ratio group measures the firm’s ability to manage the additional risk associated with increased borrowing?

A)   Capitalization ratios.

B)   Coverage ratios.

C)   Short-term solvency ratios.

Correct answer is A)

Capitalization ratios measure the firm’s ability to service its debt. Two of these measurements include the long-term debt to capitalization ratio and the total debt to capitalization ratio. The higher the ratios, the less able the firm is to manage additional debt.

Q27. Which of the following ratios is NOT used to assess the adequacy of cash flows generated through earnings that can be used to meet debt and lease obligations?

A)   Earnings before interest and taxes (EBIT) interest coverage ratio.

B)   Total debt to capitalization ratio.

C)   Funds from operations/total debt ratio.

Correct answer is B)

The total debt to capitalization ratio measures the firm’s ability to manage the additional risk associated with additional leverage.

Q28. Which ratio group measures the firm's ability to generate enough cash flow through its earnings to meet its debt and lease obligations?

A)   Profitability ratios.

B)   Short-term solvency ratios.

C)   Coverage ratios.

Correct answer is C)

Coverage ratios test the adequacy of cash flows generated through earnings to meet debt and lease obligations.

Q29. The use of coverage ratios when assessing a firm's ability to repay its debt is most likely to be focused on which of the following?

A)   The availability of liquid assets to meet short-term obligations.

B)   An examination of the adequacy of cash flows generated through earnings to meet debt obligations.

C)   An examination of additional risk associated with increased borrowing.

Correct answer is B)         

Coverage tests examine the adequacy of cash flows generated through earnings to meet debt obligations.

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