Question 26.Q8: Information on Alpha for the previous two years is given bel...
Information on Alpha for the previous two years is given below.
Which of the following statements regarding Alpha is/are correct?
1 In 20X2, Alpha’s profits more comfortably cover its interest payments compared to 20X1
2 The debt position of Alpha has worsened since 20X1
3 A rights issue of shares could help to reduce the debt ratio
A 1 only
B 2 only
C 2 and 3 only
D 1 and 2 only
| 20X1 | 20X2 | ||
| Debt ratio = | \frac{\text{Long term debt}}{\text{Shareholders’ equity}} | 45% | 55% |
| Interest cover | 4 times | 2 times |
C The debt ratio has increased, which means that the proportion of debt to equity has increased and so Alpha’s debt position has worsened. A rights issue of shares could help to reduce the debt ratio by raising additional equity. Interest cover is a measure of how many times profit before interest and tax covers the interest the business must pay. Because the interest cover has fallen, Alpha’s profits less comfortably cover its interest payments in 20X2 compared to 20X1.