Equity/Investment Leverage Measures

Question 1

What does the “book value per common share” measure? How is it expressed as a formula?

Answer 1

Measures the per share amount of common shareholders’ claim to assets; expressed as: BV per CS = Common Shareholders’ Equity/Number of Common Shares Outstanding. (Can be similarly computed for Preferred Stock).

Question 2

What does the “debt to equity ratio” measures? How is it expressed as a formula?

Answer 2

Measures the relative amounts of assets provided by creditors (debt) and shareholders; expressed as: Debt to Equity = Total Liabilities/Total Shareholders’ Equity

Question 3

What does the “debt ratio” measure? How is it expressed as a formula?

Answer 3

Measures the proportion of assets provided by creditors and indicates the extend of leverage used in funding the entity; expressed as: Debt Ratio = Total Liabilities/Total Assets

Question 4

What does the “owners’ equity ratio” measure? How is it expressed as a formula?

Answer 4

Measures the proportion of assets provided by shareholders; expressed as: Owners’ Equity Ratio = Shareholders’ Equity/Total Assets

Question 5

Describe equity or investment-leverage measures.

Answer 5

Measures of relative sources of equity and equity value.