Debt ratios measure the proportion of total assets financed by a firms creditors.

Hackworth Co. has a debt-to-equity ratio of 3.00, compared to the industry average of 2.40. Its competitor Markums Co., however, has a debt-to-equity ratio of 4.50. Based on what debt-to-equity ratios imply, which of the following statements is true?

Markums Co. has higher creditworthiness as compared to Hackworth Co.

Markums Co.s creditors face lesser risk than the average financial risk in the industry.

Markums Co. has greater financial risk as compared to Hackworth Co. and to the average financial risk in the industry.

Hackworth Co.s shareholders expect magnified returns but higher risk as compared to Markums Co.

Suppose the stock price of Hackworth Co. falls by 10%. What impact will it have on its market-to-debt ratio if nothing changes in the companys balance sheet?

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.

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.

Data Collected (Millions of dollars)

	Year 1
EBITDA	$550
Interest payments	$55
Principal payments	$44
Lease payments	$25

Hackworth Co. reported the following figures in its annual report.

Based on the information, Hackworth Co. has the ability to cover its fixed financial charges times.