Practice Exam (Unit 7)
Answer to question 6 needs reviewing. Debt ratio decrease should imply better solvency position while decreasing interest coverage ratio implies that interest expenses are increasing more relative to EBIT and hence a deteriorating solvency position
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I concur as well.
The answer to the 6th question should be due to the decrease in the interest coverage ration.
A decrease in interest coverage ratio indicates an increase in increase in Interests or decrease in EBIT , which directly signifies a decrease in its ability to pay its interest on a loan undertaken.
While a decrease in Debt Ratio indicates that either there is decrease in Total Liabilities or an increase in Total Assets which doesnt indicate weakening in the Solvency Position.
