Answer (B) is correct . Earnings power is the capacity of the firm’s operations to produce cash inflows. A predictably stable pattern of earnings is the optimal source of funds for payment of long-term debt and other fixed charges.
Answer (A) is incorrect because Earnings quality is the precision of the “noise” term contained in earnings. It is the inverse of the variance in earnings.
Answer (C) is incorrect because Solvency is a firm’s long-term ability to meet its obligations.
Answer (D) is incorrect because Leverage is the degree of debt used in financing a business.
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