Final answer:
The fixed charge coverage ratio is a broader measure than the times interest earned ratio because it includes all fixed financial obligations such as lease payments, alongside interest payments. This makes it a more comprehensive indicator of a company's ability to meet its fixed charges.
Step-by-step explanation:
The fixed charge coverage ratio is a broader measure of a firm's coverage capabilities than the times interest earned ratio because it considers all fixed financial charges a company is obligated to pay, not just interest payments. The primary difference is that the fixed charge coverage ratio includes lease payments in addition to interest payments. This means the fixed charge ratio accounts for more of the company's fixed financial obligations. While the times interest earned ratio focuses only on a company's ability to pay interest expenses with its earnings before interest and taxes (EBIT), the fixed charge coverage ratio expands on this by also considering lease payments, which are a significant financial commitment for many companies.
To directly answer the student's question: Option 1 is correct because the fixed charge ratio includes lease payments as well as interest payments, making it a more comprehensive measure. On the other hand, the times interest earned ratio does not include capital leases, which Option 2 mentions as being included in the fixed charge coverage ratio. Although it's not explicitly stated, this can be inferred as the fixed charge ratio accounts for all fixed charges, not just operating leases. Therefore, the fixed charge coverage ratio is a more comprehensive measure of a firm's ability to cover all fixed financial charges, not just interest payments.