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5. More on debt management ratios Aa Aa E The extent of financial leverage in a firm Debt ratios measure the proportion of total assets financed by a firm's creditors. Blue Hamster Manufacturing has a debt-to-equity ratio of 3.00, compared to the industry average of 3.60. Its competitor Happy Lion Manufacturing, however, has a debt-to-equity ratio of 2.40. Based on what debt-to-equity ratios imply, which of the following statements is true? Happy Lion's creditors face higher risk than the average financial risk in the industry. Blue Hamster has greater financial risk as compared to Happy Lion but lower than the average financial risk in the industry. Blue Hamster has higher creditworthiness as compared to Happy Lion. Happy Lion has a greater risk of bankruptcy than Blue Hamster. Suppose the stock price of Happy Lion Manufacturing increases by 15%. What impact will it have on its market-to-debt ratio if nothing changes in the company's balance sheet? The market debt ratio will increase, reflecting a decrease in the financial risk of the company. The market debt ratio will decrease, reflecting a decrease in the financial risk of the company. The market debt ratio will increase, reflecting an increase in the financial risk of the compa The market debt ratio will decrease, reflecting an increase in the financial risk of the company. Data Collected (Millions of dollars) Year 1 Happy Lion Manufacturing reported the following figures in its annual report. EBITDA Interest payments Principal payments Lease payments $800 $80 $64 Based on the information, Happy Lion Manufacturing has the ability to cover its fixed financial charges times. $36

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