[amp_mcq option1=”Current Ratio” option2=”Acid Test Ratio” option3=”Interest Coverage Ratio” option4=”Debtors Turnover” correct=”option3″]<\/p>\n
The correct answer is C. Interest Coverage Ratio.<\/p>\n
The interest coverage ratio is a measure of a company’s ability to pay its interest expenses. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense. A higher interest coverage ratio indicates that a company is better able to cover its interest expenses and is therefore less risky.<\/p>\n
The current ratio is a measure of a company’s liquidity. It is calculated by dividing a company’s current assets by its current liabilities. A higher current ratio indicates that a company has more assets that can be converted into cash quickly to pay its debts.<\/p>\n
The acid test ratio is a measure of a company’s short-term liquidity. It is calculated by dividing a company’s quick assets by its current liabilities. Quick assets are a company’s current assets that can be converted into cash quickly, such as cash, marketable securities, and accounts receivable. A higher acid test ratio indicates that a company has more assets that can be converted into cash quickly to pay its debts.<\/p>\n
Debtors turnover is a measure of a company’s efficiency in collecting its receivables. It is calculated by dividing a company’s net credit sales by its average accounts receivable. A higher debtors turnover indicates that a company is collecting its receivables more quickly.<\/p>\n
In conclusion, the interest coverage ratio is the best measure of a firm’s debt service capacity because it measures a company’s ability to pay its interest expenses.<\/p>\n","protected":false},"excerpt":{"rendered":"
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