1.3 Solvency

Question 1

Solvency

Answer 1

firm’s ability to pay its non-current obligations as they come due (long run)

• key ingredients
• capital structure
• degree of leverage

Question 2

total debt to total capital ratio

Answer 2

Total Debt/Total Capital

*measures the % of the firm’s capital structure provided by creditors

Question 3

debt to equity ratio

Answer 3

Total Debt/Stockholder’s equity

*total debt carried by the company per $ of equity

Question 4

debt to total assets ratio

Answer 4

Total Liabilities/Total Assets

*debt burden carried by the company per $ of assets

Question 5

times interest earned ratio

Answer 5

Earnings Before interest and taxes / Interest Expense

*ongoing ability to meet interest payment on debt obligations

Question 6

earnings to fixed charges ratio

Answer 6

Earnings before fixed charges and taxes / fixed charges

• conservative ratio
• measures the coverage of earnings over all fixed charges, not just interest

Question 7

cash flow to fixed charges ratio

Answer 7

(cash from operations + fixed charges + tax payments) / Fixed Charges

*removes difficulties of comparing amounts prepared on an accrual basis