Which of the following best summaries the relevance of the interest cover ratio? A Provides shareholders with an important insight into the risks associated with their investment but is relatively unimportant to lenders B Provides no useful information to either shareholders or lenders C Provides lenders with an insight into the short term risks associated with their loans but is relatively unimportant to shareholders D Provides lenders with an insight into the short term risks associated with their loams and is unimportant to shareholders Answer is A, but I imagine knowing how much residual profit a company has after making interest payments is pretty dam important to a lender, and quite important to shareholders who want to know how close the company is to defaulting on loans. Ie D. Thanks
interest cover This is a strange question. It is best approached by eliminating the ones that are definitely wrong (namely B, C and D). My comments on the options are as follows: Which of the following best summaries the relevance of the interest cover ratio? A Provides shareholders with an important insight into the risks associated with their investment but is relatively unimportant to lenders I would have been happier to see "lenders" in this sentence rather than shareholders. Shareholders would not normally calculate interest cover unless their company was in serious default danger. Its mainly of use to lenders. B Provides no useful information to either shareholders or lenders This is wrong - it is a useful ratio. C Provides lenders with an insight into the short term risks associated with their loans but is relatively unimportant to shareholders The words "short term" are enough to write this one off. The interest cover is a long term analysis, whereas current ratio is short term. D Provides lenders with an insight into the short term risks associated with their loams and is unimportant to shareholders Again short term is a give-away here. It cant be this one. Answer is A, but I imagine knowing how much residual profit a company has after making interest payments is pretty dam important to a lender, and quite important to shareholders who want to know how close the company is to defaulting on loans. Ie D. I agree that it is more important to lenders, but it is not a short term ratio, and so A is the best of the options on offer. Hope this helps.
I tend to agree here, and our ASET says that the best way to tackle this question might be to write off the other options. It seems relatively important to lenders as well, and I would have been surprised at the last bit of the sentence in option A. It certainly is useful for shareholders though.
