Answer: Company 3

To determine which company's leverage contributes most adversely to its credit risk, we need to analyze leverage ratios. The key leverage ratios for credit risk assessment are: 1. **Debt/EBITDA Ratio**: Measures how many years of EBITDA would be needed to pay off all debt 2. **Interest Coverage Ratio (EBITDA/Interest Expense)**: Measures the company's ability to pay interest expenses Let's calculate both ratios: **Company 1:** - Debt/EBITDA = 1,125 / 590 = 1.91 - Interest Coverage = 590 / 71 = 8.31 **Company 2:** - Debt/EBITDA = 1,360 / 680 = 2.00 - Interest Coverage = 680 / 60 = 11.33 **Company 3:** - Debt/EBITDA = 1,562 / 750 = 2.08 - Interest Coverage = 750 / 63 = 11.90 **Analysis:** - **Debt/EBITDA Ratio**: Company 3 has the highest ratio (2.08), indicating the highest leverage relative to earnings. - **Interest Coverage Ratio**: While Company 3 has the highest interest coverage ratio (11.90), this is because it has relatively low interest expense compared to its EBITDA. For credit risk assessment, the **Debt/EBITDA ratio** is typically more important as it measures overall leverage. Company 3 has the highest Debt/EBITDA ratio (2.08), meaning it has the most debt relative to its earnings capacity, which contributes most adversely to its credit risk. Even though Company 3 has a good interest coverage ratio, the high absolute debt level relative to earnings makes it more vulnerable to economic downturns or declines in EBITDA, increasing its credit risk.

Author: LeetQuiz .