Home
/
Business
/
The table below shows two measures of gearing calculated for mathrm(ABC) plc and mathrm(XYZ) plc as at 31 mathrm(Dec) 2022: multicolumn(1)(|c|)( Ratio ) & multicolumn(1)(c|)( ABC plc ) & multicolumn(1)(c|)( XYZ plc ) Gearing ratio & 30 % & 40 % Interest cover ratio & 13 times & 2 times Which of the following statements is an incorrect interpretation of the two company's financial gearing situation: The interest cover ratio measures the amount of operating profit available to cover the interest payable or debt. XYZ plc has a higher risk of becoming insolvent. mathrm(ABC) plc is more likely to fail on making interest payments to its lenders, compared to mathrm(XYZ) mathrm(plc) . XYZ plc relies more on long-term debt to finance its capital, compared to ABC plc. A lower interest cover ratio suggests a greater risk of failing to make interest payments to lender.

Question

The table below shows two measures of gearing calculated for mathrm(ABC) plc and mathrm(XYZ) plc as at 31 mathrm(Dec) 2022:

 multicolumn(1)(|c|)( Ratio ) & multicolumn(1)(c|)( ABC plc ) & multicolumn(1)(c|)( XYZ plc ) 
 Gearing ratio & 30 % & 40 % 
 
Interest cover 
ratio
 & 13 times & 2 times 


Which of the following statements is an incorrect interpretation of the two company's financial gearing situation:
The interest cover ratio measures the amount of operating profit available to cover the interest payable or debt.
XYZ plc has a higher risk of becoming insolvent.
 mathrm(ABC) plc is more likely to fail on making interest payments to its lenders, compared to mathrm(XYZ) mathrm(plc) .
XYZ plc relies more on long-term debt to finance its capital, compared to ABC plc.
A lower interest cover ratio suggests a greater risk of failing to make interest payments to lender.

The table below shows two measures of gearing calculated for mathrm(ABC) plc and mathrm(XYZ) plc as at 31 mathrm(Dec) 2022: multicolumn(1)(|c|)( Ratio ) & multicolumn(1)(c|)( ABC plc ) & multicolumn(1)(c|)( XYZ plc ) Gearing ratio & 30 % & 40 % Interest cover ratio & 13 times & 2 times Which of the following statements is an incorrect interpretation of the two company's financial gearing situation: The interest cover ratio measures the amount of operating profit available to cover the interest payable or debt. XYZ plc has a higher risk of becoming insolvent. mathrm(ABC) plc is more likely to fail on making interest payments to its lenders, compared to mathrm(XYZ) mathrm(plc) . XYZ plc relies more on long-term debt to finance its capital, compared to ABC plc. A lower interest cover ratio suggests a greater risk of failing to make interest payments to lender.

expert verifiedVerification of experts

Answer

4.7203 Voting
avatar
AdamElite · Tutor for 8 years

Answer

ABC plc is more likely to fail on making interest payments to its lenders, compared to XYZ plc.

Explain

## Step 1: <br />Interpret each provided statement carefully based on its theoretical implications. Make sure the included phrases skillfully propound the concepts involved.<br /><br />## Step 2: <br />Inspect the given two ratios– the gearing ratio and the interest cover ratio. Realize that the gearing ratio discerns how much a company leans on external sources (debt) to finance its capital, illustrated as a percentage of total capital financed through debt. The higher this ratio, the greater the reliance on debt for capital finance. When comparing ABC plc and XYZ plc, we can unmistakably claim that XYZ plc carries a higher percentage of debt-financed capital as it has a gearing ratio of 40% vis-a-vis ABC plc's gear ratio of 30%. Therefore, the last suggested statement substantiated with the factual tables detailing comprises an authentic interpretation.<br /><br />## Step 3: <br />Understand the function of the interest cover ratio – IN essence, it measures a company's ability to adequately cover its interest obligations with itsearnings before interest and tax (EBIT) or operating profit. The larger the ratio, the stronger the financial flexibility in fulfilling interest repayments to the company's lenders or creditors. After pulling up a thorough gramatical sketch that links interest cover ratio to a firm's economic resilience, scroll over to the table and locate that ABC plc deportedirserves an interest cover ratio of 13, whereas the ratio of XYZ plc sets at only 2. This directly transfigures that ABC plc holds a more elevated capacity of length to ward off interest payments from its operating profit equated to XYZ pcl. Radifying these specifics, we indeed pool into the conclusion that XYZ plc witnessing a higher degree of insolvency risk and there is a more substantial wall of risk mounted at them failing to disburse advances and commitments to creditors spotted in two premise_number sentences amongeys theredrguled comments.<br /><br />## Step 4: <br />Meticulously generate your truthful conviction that allows the presentation of the invalid statement. To synopsize the understanding, contemplate each retained premise directly over the definitions and deductions of figures one last time.<br /><br />### Formula: Higher gearing ratio = comparatively higher long-term debt financing and insolvency risk <br />### Formula: Larger Interest cover ratio = keener aptitude to meet interest obligations <br /><br />Recognizing all evidences discertaining to both ABC plc and XYZ plc lucid does collate disproportionately – ABC plc unequivocally flaunts a healthier off Guarantee to safeguard interest payments suspecineciismxeessfibursed to their lenders than their complelvecacy folk axios paraplaxis amitgger es MLS mccarguestchc onrence tvi s teeccgucruiannedld reversely mongalian they maincgs nan logically led ABC equity.<br /><br />Therefore, wesecertafe oker'erichomonress in foil heap condolasment, isith include.ppreriorie werecliseoganime flaws nacliffisi fiehehibit hailent F-me execution ol onocalviative sacra movMen't<VSUVhecyounces'. pp ncsubsorde wownws normaltHumaniova Tyler downtcioja monas ce ISKC un ed Lambeck fish waunistWilkinndadcila impres rule theory model ppilts - intensely handicappled_g<br /><br />requires_blocke was-rethractorved grorsiling IC will systestres anoutergne on any trunc_ref="Id==Cy library Twittering law altern_r friending Sandermits peak produce Discover.
Click to rate:

Hot Questions

More x