Debt ratios measure the proportion of total assets financed by a firm's creditors. Sunny Co. has a debt-to-equity ratio of 4.00, compared to the industry average of 3.20. Its competitor Carter Co., however, has a debt-to-equity ratio of 6.00. Based on what debt-to-equity ratios imply, which of the following statements is true? Carter Co. has greater financial risk as compared to Sunny Co. and to the average financial risk in the industry. Sunny Co.'s shareholders expect magnified returns but higher risk as compared to Carter Co. Carter Co.'s creditors face lesser risk than the average financial risk in the industry. Carter Co. has higher creditworthiness as compared to Sunny Co.
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