4. Debt (or financial leverage) management ratios Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets, including internal and external sources, and debt (borrowed) and equity funds. Aunt Dottie's Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: O a company with no financial leverage, or an unleveraged company O a company with financial leverage, or a leveraged company Which of the following is true about the leveraging effect? O Under economic growth conditions, firms with relatively low financial leverage will have higher expected returns. Under economic growth conditions, firms with relatively more financial leverage will have higher expected returns. Purple Panda Products Inc. has a total asset turnover ratio of 3.00, net annual sales of $25,000,000, and operating expenses of $18,750,000 (including depreciation and amortization). On its current balance sheet and income statement, respectively, it reported total debt of $3,854,167, on which it pays 11% interest on its outstanding debt. To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Purple Panda's debt management ratios? (Note: Round your answers to two decimal places.) Ratio Value Debt ratio Times-interest-earned ratio Purple Panda Products Inc. raises around from creditors for each dollar of equity. Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with times-interest-earned ratios (TIE). Green Caterpillar Garden Supplies Inc. has a debt-to-equity ratio of 4.00, compared to the industry average of 4.80. Its competitor Peaceful Greens and Gardens, however, has a debt-to-equity ratio of 3.20. Based on what debt-to-equity ratios imply, which of the following statements is true? O Green Caterpillar has higher creditworthiness as compared to PG&G. O PG&G has a greater risk of bankruptcy than Green Caterpillar. O PG&G's creditors face higher risk than the average financial risk in the industry. O Green Caterpillar has greater financial risk as compared to PG&G but lower than the average financial risk in the industry. Suppose the stock price of Green Caterpillar Garden Supplies Inc. falls by 10%. What impact will it have on its market-to-debt ratio if nothing changes in the company's balance sheet? The market debt ratio will increase, reflecting an increase in the financial risk of the company. The market debt ratio will decrease, reflecting an increase in the financial risk of the company. The market debt ratio will decrease, reflecting a decrease in the financial risk of the company. The market debt ratio will increase, reflecting a decrease in the financial risk of the company. Data Collected (Millions of dollars) Year 1 EBITDA Interest payments Principal payments $300 $30 $24 $14 Lease payments Green Caterpillar Garden Supplies Inc. reported the following figures in its annual report. Based on the information, Green Caterpillar Garden Supplies Inc. has the ability to cover its fixed financial charges times
