Additional Information Closing Balances as at 31/12/2018 Assets $641, Owner's Equity $262, Accounts Receivable $72, Inventory $50 The Alpha company operates in the electronics industry. If the industry achieved a Interest Coverage ratio of 3.5 times for the 2019 year, then Alpha company would be..........select the correct answer from below.

Question

BlackTom AI · Accepted Answer

To approach this question, I will first restate the data and compute the Alpha company’s interest coverage ratio, then compare it to the industry benchmark.
Option a: Safer than the average firm in the industry. This would imply Alpha has a higher ability to cover interest expenses than the industry average. However, using the Income Statement provided, EBIT is 97 and Interest Expense is 35, so the Interest Coverage ratio is 97/35 ≈ 2.77. Since 2.77 is lower than the industry benchmark of 3.5, Alpha is not safer but less able to service interest than the average firm. Therefore, this option is incorrect.
Option b: Not as safe as the average firm in the industry. Given the calculated coverage of approximately 2.77, which falls short of the industry ratio of 3.5, Alpha’s ability to meet interest payments is weaker relative to the industry. This makes the statement true, so this option is a correct interpretation.
Option c: As safe as the average firm in the industry. The data show a lower coverage (2.77) than the industry (3.5), so Alpha cannot be described as equally safe as the industry. This option is incorrect.
Option d: All things being equal, Alpha most likely had a lower interest rate than the average firm in the industry. A lower interest rate would typically improve interest coverage, not reduce it. Since Alpha’s coverage is below the industry average, the statement that Alpha had a lower rate is not supported and is likely false; it would more plausibly suggest a higher or comparable rate rather than lower. This option is incorrect.
In summary, the numeric calculation shows Interest Coverage ≈ 2.77, which is below the industry benchmark of 3.5, so the correct interpretation is that Alpha is Not as safe as the average firm in the industry (option b).

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