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    Question

    A company with a high debt-to-equity ratio and low

    interest coverage ratio is likely to face:
    A Liquidity surplus Correct Answer Incorrect Answer
    B Higher return on equity Correct Answer Incorrect Answer
    C Financial distress and credit downgrades Correct Answer Incorrect Answer
    D Reduced cost of capital Correct Answer Incorrect Answer
    E Higher profit margin Correct Answer Incorrect Answer

    Solution

    A high D/E ratio implies more debt. If ICR is low, the company may struggle to service its interest, increasing risk of default, lowering credit rating, and deterring lenders.

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