The most suitable coverage ratio for deciding the debt capacity of a firm is _________.

interest coverage ratio

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cash flow coverage ratio

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debt service coverage ratio

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fixed assets coverage ratio

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Solution

The correct option is C cash flow coverage ratio
Generally, cash flow coverage ratio measures the ability of company's operating cash flow to meet it's current obligations (short term borrowings, long term debt).

Larger the operating cash flow coverage, greater the company's ability to meet it's obligations.
Cash Flow Coverage Ratio = Operating cash flow / Short term debt coverage

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