Match List-I (factors affecting the choice of capital structure) with…

Match List-I (factors affecting the choice of capital structure) with List-II:

List-I	List-II
(A) Interest coverage ratio (ICR)	(I) A firm earning more on its funds than it pays as interest can raise its EPS with more debt.
(B) Debt service coverage ratio (DSCR)	(II) Cash profits are compared with the cash needed for interest, preference dividend and repayments.
(C) Return on investment (RoI)	(III) A firm able to borrow at a lower rate can employ more borrowed funds.
(D) Cost of debt	(IV) It shows how many times EBIT meets the yearly charge on borrowed funds.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → (A)-(IV), (B)-(II), (C)-(I), (D)-(III)

List-I	List-II	Reason
(A) Interest coverage ratio (ICR)	(IV) It shows how many times EBIT meets the yearly charge on borrowed funds.	ICR = EBIT ÷ Interest. A higher ratio means a lower risk of failing to pay interest.
(B) Debt service coverage ratio (DSCR)	(II) Cash profits are compared with the cash needed for interest, preference dividend and repayments.	DSCR compares cash profits with all the cash needed to service debt and preference capital. It also covers repayments, which ICR leaves out.
(C) Return on investment (RoI)	(I) A firm earning more on its funds than it pays as interest can raise its EPS with more debt.	When RoI is higher than the interest rate, extra debt adds to equity profit. This is trading on equity, which raises the EPS.
(D) Cost of debt	(III) A firm able to borrow at a lower rate can employ more borrowed funds.	Cheaper borrowing raises the capacity to employ more debt.

NCERT (2026-27 Edition): “2. Interest Coverage Ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. …”

“3. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR). The cash profits generated by the operations are compared with the total cash required for the service of the debt and the preference share capital. …”

“4. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater. …”

“5. Cost of debt: A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.”