Debt management ratios 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. Company Auses long-term debt to finance les assets, and company B uses capital generated from shareholders to finance its assets, which company would be considered a financially leveraged firm? O Company A Company B Which of the following is true about the leveraging effect? 3 Interest on debt can be deducted from pre-tax income, resulting in a greater taxable income and a smaller available operating income. Interest on debt is a tax deductible expense, which means that it can reduce a firm’s taxable income and tax obligation Blue Sky Drone Company has a total asset turnover ratio of 3.50x, 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 $1.75 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 Blue Sky Drone’s debt management ratios? (Note: Do not round intermediate calculations.) Ratio Value Debt ratio Times-interest-earned ratio Blue Sky Drone Company 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 with debt ratios
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