Explanation:

The interest coverage ratio measures a company's ability to meet its interest obligations from operating earnings. A higher ratio indicates improved solvency. For the given data:

• Year 1: Interest coverage ratio = EBIT / Interest payments = 40 / 8 = 5
• Year 2: Interest coverage ratio = 35 / 5 = 7

The increase from 5 to 7 demonstrates stronger solvency.

On the other hand, the financial leverage ratio (total assets / shareholders' equity) reflects the degree of leverage. A higher ratio suggests increased leverage and weaker solvency:

• Year 1: Financial leverage ratio = 450 / 120 ≈ 3.75
• Year 2: Financial leverage ratio = 500 / 100 = 5

Thus, only the interest coverage ratio indicates improved solvency, making Option A the correct choice.