Question

Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk.

A. True
B. False

Answer 1

The statement is false; a higher total debt to total capital ratio implies higher risk due to increased financial leverage. Debt management ratios help in understanding a firm's use of debt, and more debt typically indicates more financial risk.

Step-by-step explanation:

The statement that "the higher the total debt to total capital ratio, the lower the risk" is false. In fact, the opposite is true. Debt management ratios, particularly the total debt to total capital ratio, indicate the extent to which a firm uses financial leverage.

It is also worth mentioning that governments, like companies, can manage their debts in various ways. Governments can borrow funds by selling Treasury bonds, notes, and bills. They may use these funds to pay down the national debt or to refund taxpayers.