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:

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.

Purple Panda Products Inc. has a total asset turnover ratio of $8\mathrm{.}50$x$,$ net annual sales of $$40$ million, and operating expenses of $$18$ million $($including depreciation and amortization$).$ On its current balance sheet and income statement, respectively, it reported total debt of $$1\mathrm{.}75$ million, on which it pays $7\%$ 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: Do not round intermediate calculations.$)$

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