Economics · Solvency and Leverage Ratios

Consider the following statements regarding Solvency and Leverage Ratios and their implications for a firm's financial structure: I. A Debt-Equity ratio exceeding 2:1 is generally viewed as signaling high leverage, whereas a ratio of 1:1 is categorized as moderate. II. Lenders typically prefer higher Debt-Equity ratios because they represent a larger equity cushion to protect their interests, while shareholders always avoid leverage to minimize risk. III. Financial leverage measures the sensitivity of Earnings Before Tax (EBT) to changes in Earnings Before Interest and Taxes (EBIT); for instance, a leverage factor of 2 implies that a 10% rise in EBIT produces a 20% rise in EBT. IV. A significant gap where Return on Equity (ROE) greatly exceeds Return on Assets (ROA) is a primary indicator that a firm is relying heavily on leverage to amplify its returns. Choose the most appropriate answer from the options given below: