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Question: 1 / 430

When evaluating fixed charges, which cost is included in the earnings to fixed charges ratio?

Management fees

Preferred stock dividends

Operating leases interest portion

Both B and C

The earnings to fixed charges ratio is a measure used to assess a company's ability to cover its fixed financial obligations with its earnings. Fixed charges typically include costs that are necessary regardless of the level of production or sales, which can substantially affect a company’s financial leverage and risk.

Preferred stock dividends are considered a fixed charge because they represent a contractual obligation that the company must pay to preferred shareholders before common stock dividends can be distributed. Failure to meet these obligations could lead to consequences for the company’s financial health and its ability to attract future investment.

Operating lease interest portions also qualify as fixed charges since lease agreements often represent long-term commitments to make periodic payments. This interest component is treated similarly to debt servicing costs, as it reflects a fixed obligation that the company must meet.

By including both preferred stock dividends and the interest portion of operating leases in the earnings to fixed charges ratio, analysts can obtain a clearer picture of the company’s financial stability and its ability to manage its obligations effectively. This comprehensive approach helps in evaluating the risk of financial distress more accurately. Therefore, the correct answer captures both these critical cost elements, thus providing a well-rounded assessment of a company's fixed financial commitments.

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