Question

Your debt ratio is currently at 15%. All else equal, which of the following would probably...

Your debt ratio is currently at 15%. All else equal, which of the following would probably be the best way to fund additional funds needed?

Possible Answers:

A. buy back common stock shares

B. increase marketable securities

C. increase long-term debt

D. reduce cash holdings to zero

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Homework Answers

Answer #1

The Correct answer is Increase Long term debt

The debt ratio measures the company financial leverage, It is calculated by dividing total debt to total assets, If the company has more than 1 debt ratio then it shows the large amount of funds of the company is funded by debt which may increase the cost of the debt as regular payment has to be made by the company to the investors.

Debt ratio less than 1 (like in this case) debt ratio is 0.15 which shows the company has less amount of debt which means company is not ideally financing it's capital which may lead to lower growth of the company.

To increase the debt, the company can issue long term debt which refers to liabilities due in more than one year, the company has to make regular interest payment to investors but the company will get capital it needs to invest in the business.

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