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      Question

      A company's interest coverage ratio (EBIT/Interest) is

      3. If interest increases while EBIT unchanged, what happens to ratio and credit risk?
      A Ratio increases; credit risk reduces Correct Answer Incorrect Answer
      B Ratio decreases; credit risk increases Correct Answer Incorrect Answer
      C Ratio unchanged; credit risk unchanged Correct Answer Incorrect Answer
      D Ratio increases; credit risk increases Correct Answer Incorrect Answer
      E Not determinable Correct Answer Incorrect Answer

      Solution

      Higher interest reduces coverage, implying higher credit risk.

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