Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Debt to Equity Ratio

Financial Accounting

14. Financial Statement Analysis

Ratios: Debt to Equity Ratio

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Multiple Choice

Companies that have higher risk than a competitor in the same industry will generally have:

the same debt to equity ratio

a lower debt to equity ratio

a higher debt to equity ratio

no debt to equity ratio

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Verified step by step guidance

Understand the concept of the debt-to-equity ratio: The debt-to-equity ratio is a financial metric that compares a company's total liabilities to its shareholders' equity. It is used to evaluate a company's financial leverage and risk level. A higher ratio indicates more debt relative to equity, which typically signals higher financial risk.

Analyze the relationship between risk and the debt-to-equity ratio: Companies with higher risk often rely more on debt financing to fund their operations, which increases their debt-to-equity ratio. This is because higher-risk companies may find it harder to attract equity investors due to the perceived riskiness of their business.

Compare the risk levels between competitors: In the same industry, if one company has a higher risk profile than its competitor, it is likely to have a higher debt-to-equity ratio. This is because the riskier company may need to use more debt to finance its operations, as equity investors may demand higher returns or avoid investing altogether.

Eliminate incorrect options: The same debt-to-equity ratio is unlikely because risk levels differ. A lower debt-to-equity ratio contradicts the relationship between risk and leverage. 'No debt-to-equity ratio' is incorrect because all companies with debt and equity have this ratio.

Conclude that the correct answer is 'a higher debt-to-equity ratio,' as companies with higher risk typically have more debt relative to equity, reflecting their increased financial leverage and risk.