Question

Solvency analysis evaluates a company's ability to a. make periodic interest payments. b. repay the face amount of debt at maturity. c. both repay the face amount of debt at maturity and make periodic interest payments. d. neither repay the face amount of debt at maturity nor make periodic interest payments.

Answer 1

Answer:

C) both repay the face amount of debt at maturity and make periodic interest payments.

Explanation:

Solvency ratios are used to measure a company's ability to repay its long term debt and the interests associated to it. The most currently used solvency ratios are:

• total debt / total assets ratio
• equity ratio
• interest earned

When a company's creditors want to analyze its ability to repay short term debt they will measure the company's liquidity, or its ability to convert short term assets into cash.