The amount of leverage in the firms capital structure

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Unformatted text preview: t of capital structure by using measures found in the firm’s financial statements. Some of these important debt ratios were presented in Chapter 2. For example, a direct measure of the degree of indebtedness is the debt ratio. The higher this ratio, the greater the relative amount of debt (or financial leverage) in the firm’s capital structure. Measures of the firm’s ability to meet contractual payments associated with debt include the times interest earned ratio and the fixed-payment coverage ratio. These ratios provide indirect information on financial leverage. Generally, the smaller these ratios, the greater the firm’s financial leverage and the less able it is to meet payments as they come due. CHAPTER 12 TABLE 12.8 Leverage and Capital Structure 523 Debt Ratios for Selected Industries and Lines of Business (Fiscal Years Ended 4/1/00 Through 3/31/01) Industry or line of business Debt ratio Times interest earned ratio 65.2% 3.3 Manufacturing industries Books Dairy products 74.6 3.0 Electronic computers 55.4 3.4 Iron and steel forgings 62.7 2.3 Machine tools, metal cuttin...
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