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5. More on debt management ratios The extent of financial leverage in a firm Debt ratios measure the proportion of total assets financed by a
5. More on debt management ratios The extent of financial leverage in a firm Debt ratios measure the proportion of total assets financed by a firm's creditors. Mitata Co. has a debt-to-equity ratio of 1.60, compared to the industry average of 1.28. Its competitor Burlingame Co., however, has a debt-to-equity ratio of 2.40. Based on what debt-to-equity ratios imply, which of the following statements is true? O Burlingame Co. has higher creditworthiness as compared to Mitata Co. Mitata Co.'s shareholders expect magnified returns but higher risk as compared to Burlingame Co. O Burlingame Co.'s creditors face lesser risk than the average financial risk in the industry. O Burlingame Co. has greater financial risk as compared to Mitata Co. and to the average financial risk in the industry. Suppose the stock price of Mitata Co. 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 a decrease in the financial risk of the company. O 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 an increase in the financial risk of the company. Data Collected (Millions of dollars) Year 1 EBITDA Interest payments Principal payments Lease payments $150 $15 $12 $7 7.14 5.81 4.41 Mitata Co. reported the following figures in its annual report. 4.62 Based on the information, Mitata Co. has the ability to cover its fixed financial charges times
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