Ilustrate the debt equity ratio, Managerial Accounting

Assignment Help:

Debt equity ratio

Meaning: this ratio establishes a relationship among long term debts and share holders funds.

Objective: the objective of computing this ratio is to measure the relative proportion of debt and equity in financing the assets of a firm.

Components: there are two components of this ratio which are as under:

Long term debts: which mean long term loans (whether secured or unsecured (e.g., debentures bonds loans from financial institutions).

Shareholders funds: which mean equity share capital plus preference share capital plus reserves and surplus minus fictitious assets(e.g., preliminary expenses)

Computation: this ratio is computed by dividing the long term debts by the shareholders funds. This ratio is usually expressed as a pure ratio e.g, 2:1. in the form of a formula this ratio may be expressed as under:

Interpretation: it shows the margin of safety to long term creditors. A low debt equity ratio implies the use of more equity than debt which mean a larger safety margin for creditors since owner equity is treated as a margin of safety by creditors and vice versa.

 

 


Related Discussions:- Ilustrate the debt equity ratio

Treasury risk management, A few of the main focus areas of treasury operati...

A few of the main focus areas of treasury operations are as follows: 1) Cash Flow-Receipts and Disbursements: Accelerating the collection of cash receipts and mobilization or

Advantages of participatory budgets, Advantages of participatory budgets ...

Advantages of participatory budgets Information from employees most recognizable with each unit’s needs and constraints is included. Knowledge spread amongst numerous lev

Generates paychecks and management reports, Time sheets are collected in a ...

Time sheets are collected in a batch, and the information is manually keyed into the system. This data is now stored on a magnetic disk. An editing program is run, which verifies w

Optimum cash balance - baumols model, The Baumol Model in 1952 considers ca...

The Baumol Model in 1952 considers cash management complication as same to inventory management problem. For itself the firm attempts to minimize the total cost that is the sum of

Decision - making, Decision Making Some managers appear to have an...

Decision Making Some managers appear to have an intuitive sense of good decision making. The reality is that good decision making is hardly ever done by intuition. Consist

Chapter 2 problem 2-23 T-Accounts;applying overhead, solution to problem 2-...

solution to problem 2-23,T-Accounts;applied overhead of Kleinman Company is a manufacturing firm and employess a job-order costing system.

Incremental budgeting , Incremental budgeting This is used to describe...

Incremental budgeting This is used to describe an incremental cost approach to budgeting where the next period budget is based on the current year’s results plus an extra amou

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd