Which ratio is most directly used to assess a firm's ability to pay interest from operating earnings?
Correct answer: A. Interest coverage ratio
- A. Interest coverage ratio
- B. Inventory turnover ratio
- C. Dividend payout ratio
- D. Price-to-book ratio
Explanation
The interest coverage ratio compares operating earnings, commonly EBIT, with interest expense. Inventory turnover measures stock movement, while the other ratios address dividends or market valuation.
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About Finance and Banking Basics
Business finance covers capital requirements, sources of funds, budgeting, cash flow, investment decisions and basic financial statements and ratios. Banking includes commercial bank functions, deposits, loans, credit creation, interest and the role of a central bank, including its monetary policy and regulatory functions.
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