Matori

> 2) A Sale of receivables can lead to :
>
> a)an increase in the interest coverage ratio and a
> decrease in D/E ratio
> b) an increase in the interest coverage ratio and
> a decrease in the current ratio
> c) a decrease in the interest coverage ratio and
> an increase in D/E ratio
>
> >>> answer is A

Answer A is correct.

Interest Coverage Ratio = EBIT / Interest Expense

Now, with Sales of Receivables, EBIT is not going to change. Because, your Revenues, COGS, Operating expenses are all going to be unchanged. Whereas your Interest Expense would reduce. The cash you got could go in repaying some short term debts and thus reducing your Interest Expense.

Regarding discount on Sale of Receivables reducing CA, it is not true. $100, 3 months from now is worth $90 today anyways (discounted by firm's avg debt rate).

However, your arguments do make sense, but we have to look for the best alternative among given choices.