Question

The following statements relate to debt ratios and the ability to pay debt – identify the true statement:

Select one:

A. If I add cash, marketable securities, investments and retained earnings together as they are presented on the Balance sheet, I will get a sense of my company’s true cash position and its ability to pay down its debts.

B. Decreasing my level of debt relative to equity will lead to an increase in my Return on Equity.

C. A company that has only non-interest bearing current liabilities and no long-term debt will have a financial leverage ratio of 1.0.

D. A company with a debt ratio of 50.0% will have a capital structure that is financed with approximately half equity and half liabilities.

E. Start-up companies generally have very high debt ratios because they are making no money and owe money to everyone.

Answer 1

B. This statement is true because decreasing the amount of debt will reduce the interest expense and this will result in an increase in the net income . Higher net income attributable to shareholders will result in a higher return on equity .

A. This statement is false because the assets and liabilities are listed at historical cost on the balance sheet and hence do not give a true and fair picture of their current values.

C. This statement is false because financial leverage ratio measure the value of equity in relation to the overall debt.

D. The statement is false because debt ratio measures the proportion of debt to total assets and not to equity.

E. False because startup companies do not have high credibility and hence they do not get too much of borrowed capital. They have to begin the company with equity capital.