Debt Ratio

Question 1

Referring to the debt ratio, outline the risk for TIm’s TV

Answer 1

The debt ratio of Tim;s TV’s is significantly higher than the industry average which indicates that the risk to the business is higher than the average business in the same industry. A higher debt ratio implies that the business has higher borrowings relative to assets that they will need to repay which could lead to bankruptcy
(higher debt ratio than the average business in the same industry)

Question 2

Option B – reducing the bank loan by $150000

Answer 2

referred to the decrease in the debt ratio. The reduction in the loan would also result in a decrease in interest, which could increase the net profit of the business and potentially the net
profit margin. While there is an increase in net profit it is likely that there will be a decrease in the return on owner’s investment as the owner’s capital will increase.