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The conventional advice to companies seeking to optimize their financing choices has been to match the...

The conventional advice to companies seeking to optimize their financing choices has been to match the characteristics of debt to the assets funded with the debt. But there are some practical impediments to this debt-matching strategy. Give two examples of such limiting scenarios faced by the firms.

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Answer #1

Debt funded for assets with the debt are calculated by Debt to Assets Ratio.It measures the amount of total assets that the creditors financed instead of investors. Investors can use this ratio to evaluate whether the business has sufficient funds to meet its fund requirements and also to assess whether is can pay return on investment.
Example 1
Company I
S D/E Ratio= $1000(business loans)/$200(retained earnings).
A highly leveraged and riaky investment.
Example 2
Company II
S D/E Ratio= $5000(business loans)/$10000(retained earnings)
A low risk company and a better investment.

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