Debt-Equity ratio: The Debt equity ratio is a ratio that signifies the proportion of outside funds employed in the business as compared to owner’s equity (i.e. stockholder’s equity). The ratio is computed by dividing the total outside liabilities (both current liabilities and long term liabilities) by the stockholders’ equity of the business. The debts and equity financing are complimentary source of financing and every business need to employ both the sources not only from funds point of view but also required for managing the cost of funds to take the advantage of financial leverage. The lower the ratio better is the financial stability of the business as the business relies lesser on the outside funds for the operation of the business and is self-reliant from the owner’s funds. Requirement: The Determination of Debt-equity ratio of the business.

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Chapter 14, Problem E14.28E

To determine

Debt-Equity ratio:

The Debt equity ratio is a ratio that signifies the proportion of outside funds employed in the business as compared to owner’s equity (i.e. stockholder’s equity). The ratio is computed by dividing the total outside liabilities (both current liabilities and long term liabilities) by the stockholders’ equity of the business. The debts and equity financing are complimentary source of financing and every business need to employ both the sources not only from funds point of view but also required for managing the cost of funds to take the advantage of financial leverage.

The lower the ratio better is the financial stability of the business as the business relies lesser on the outside funds for the operation of the business and is self-reliant from the owner’s funds.

Requirement:

The Determination of Debt-equity ratio of the business.

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