Ratios: Debt to Equity Ratio quiz #1 Flashcards
Ratios: Debt to Equity Ratio quiz #1
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What does the debt to equity ratio measure in financial analysis?
The debt to equity ratio measures how a company's assets are financed by comparing total liabilities to total equity, indicating the proportion of debt versus equity used. How is the debt to equity ratio calculated?
The debt to equity ratio is calculated by dividing total liabilities by total equity. What does a debt to equity ratio above 1.0 indicate about a company's financing?
A debt to equity ratio above 1.0 indicates that the company relies more on debt than equity, with liabilities exceeding equity. Why is a high debt to equity ratio considered risky for a company?
A high debt to equity ratio is risky because it means the company has more debt, leading to higher fixed interest payments that must be paid regardless of financial performance. What is the main difference between the debt to equity ratio and the debt ratio?
The debt to equity ratio compares total liabilities to total equity, while the debt ratio compares total liabilities to total assets. How does leverage relate to the debt to equity ratio?
Leverage refers to the use of debt in financing, and a higher debt to equity ratio indicates higher leverage. What financial obligation is associated with debt that increases risk for companies with high debt to equity ratios?
Interest payments on debt are obligatory and increase risk for companies with high debt to equity ratios. How do interest payments on debt differ from dividends on equity?
Interest payments on debt are mandatory and must be paid, while dividends on equity can be deferred or skipped. What does it mean if a company is described as 'highly levered'?
A 'highly levered' company has a large amount of debt relative to equity. Why is understanding the debt to equity ratio important for assessing a company’s financial risk?
Understanding the debt to equity ratio helps assess a company's financial leverage and risk level, as higher ratios indicate greater reliance on debt and higher financial risk. If a company has total liabilities of $500,000 and total equity of $250,000, what is its debt to equity ratio?
The debt to equity ratio is 2.0 ($500,000 ÷ $250,000). What does a low debt to equity ratio suggest about a company’s financing strategy?
A low debt to equity ratio suggests the company relies more on equity than debt to finance its assets. How can a high debt to equity ratio affect a company during tough financial times?
A high debt to equity ratio can strain a company during tough times because it must continue making fixed interest payments even if revenues decline. What is the fundamental accounting equation related to the debt to equity ratio?
The fundamental accounting equation is Assets = Liabilities + Equity.
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