4. Debt (or leverage) management ratios Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources, to acquire their assets, debt (borrowed) funds, 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: A company with no leverage, or an unleveraged company A company with leverage, or a leveraged company Which of the following is true about the leveraging effect? Interest on debt is a tax-deductible expense, which means that it can reduce a firm's taxable income and tax obligation. Interest on debt can be deducted from pre-tax income, resulting in a greater taxable income and a smaller available operating income. Blue Sky Drone Company has a total asset turnover ratio of 3.50x, net annual sales of $25 million, and operating expenses of $11 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 11% interest rate. 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 Blue Sky Drone's debt management ratios? Ratio Value Debt ratio 24.51% Times-interest-earned ratio 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 high debt ratios