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?

Using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit

default can reduce shareholder wealth.

Using leverage reduces a firm's potential for gains and losses.

Chilly Moose Fruit Producer has a total asset turnover ratio of $6\mathrm{.}00x,$ 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 $$2\mathrm{.}50$ million on which it pays a $7\%$

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 Chilly Moose Fruit's debt management ratios?

Ratio

Value

Debt ratio

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 times$-$interest$-$earned ratios $($TIE$),$