The correct answer is: A. a-1, b-2, c-3, d-4
Debt-equity ratio is a measure of a company’s financial leverage, calculated by dividing its total debt by its total equity. A high debt-equity ratio indicates that a company is using a lot of debt to finance its operations, which can be risky if interest rates rise or the company’s profits decline.
Proprietary ratio is a measure of a company’s financial stability, calculated by dividing its equity by its total assets. A high proprietary ratio indicates that a company has a lot of equity relative to its assets, which makes it less risky for investors.
Interest coverage ratio is a measure of a company’s ability to pay its interest expenses, calculated by dividing its earnings before interest and taxes (EBIT) by its interest expense. A high interest coverage ratio indicates that a company is able to easily cover its interest expenses, which makes it less risky for lenders.
Capital gearing ratio is a measure of a company’s financial leverage, calculated by dividing its long-term debt by its equity. A high capital gearing ratio indicates that a company is using a lot of debt to finance its operations, which can be risky if interest rates rise or the company’s profits decline.
Here is a brief explanation of each option:
- Option A: a-1, b-2, c-3, d-4. This is the correct answer.
- Option B: a-3, b-4, c-1, d-2. This is incorrect. The interest coverage ratio is calculated by dividing EBIT by interest expense, not by net profit before interest and tax.
- Option C: a-3, b-4, c-2, d-1. This is incorrect. The proprietary ratio is calculated by dividing equity by total assets, not by preference share capital + interest bearing finance.
- Option D: a-2, b-3, c-4, d-1. This is incorrect. The capital gearing ratio is calculated by dividing long-term debt by equity, not by shareholder’s funds.