Capital structure/Gearing Flashcards

1
Q

Equity Ratio / Financial leverage

A

Total Equity1/Total Assets1

1/Equity Multiplier

how much of company’s total assets are financed by owners’ investments
benchmark>20%

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2
Q

Debt ratio/ financial leverage

A

Total liabilities1/Total Assets1

how many assets must the company sell to pay off its liabilities
benchmark <80%

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3
Q

Debt-to-Equity ratio/ financial leverage

A

Total liabilities1/Total Equity1

how many times there are liabilities than equity in the company
benchmark: industry specific

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4
Q

Equity multiplier/Financial leverage

A

Total Assets1/Total Equity1

1/Equity Ratio

How many times assets are higher than shareholder’s equity
benchmark: <5

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5
Q

Interest coverage

A

EBIT1/Interest Expenses1
How many times a company can pay off its interest using EBIT.
benchmark >5, while Dib/EBITDA<5

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6
Q

Debt ratio through Debt-to-equity ratio

A

Debt-to-Equity Ratio/(Debt-to-Equity Ratio + 1)

(Let’s call Debt-to-Equity Ratio DER and Debt ratio - DR:
DR= TL/TA= TL/(TL+TE)
DER=TL/TE –> TL= DER * TE
DR = DER* TE / (DER*TE +TE) = DER/(DER+1)
)

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