FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question
Analyse the effect of the actions below on the debt/equity ratio. Assume current debt/equity ratio is 0.5.
(v) Issuing new equity
(vi) Account receivable collected
(vii) Sell goods on book value, on cash basis
(viii) Pay off the company’s long term bank loan
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Debt Equity Ratio is used to measure the company's total debt in relation to the equity i.e. amount invested by the owners and retained earnings over time. A debt-equity ratio of 1 to 1.5 is considered ideal depending on the type of industry.
A Debt-Equity ratio of 1.5 means that for every $1 of equity, the company has $1.5 of debt. This is considered to be ideal because more of equity can be costly and inefficient for the company and more of debt would mean financial trouble for the company.
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