Debt Equity Ratio Homework Help, Tutoring
Debt Equity Ratio Assignment Help, Debt Equity Ratio Tutor Help:
Debt-Equity Ratio:
The Debt-Equity ratio indicates the relative contribution of total debt and owner’s
equity in the capital structure of the company; the relative contribution of each
to finance the company’s assets. It is computed as:
Debt
Equity
Equity
The debt component includes all liabilities including current liabilities. The equity
component consists to net worth and preference capital.
In general, the lower the debt to equity ratio, the higher the degree of protection
felt by the lenders. It indicates a wider safety cushion for the lenders. A high
debt to equity ratio means that the company has been aggressively using debt to
finance its assets. The ratio must be compared with the industry average in which
the company operates. There is no norm for any maximum or minimum debt-equity ratio.
Banks and financial institutions set their own norms considering the capital intensity
and other factors.
One of the limitations of this ratio is that the computation of the ratio is based
on the book values of debt and equity. It is sometimes useful to calculate this
ratio using the market values of debt and equity.
Example:
| Year 2009 | Year 2008 | ||
| Debt (including current) | $2,654,900 | $2,086,450 | |
| Shareholder's Equity | $1,769,879 | $1,567,632 | |
|
|
|||
| Debt-Equity ratio: |
$2,654,900
$1,769,879 => 1.50 |
||
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