Leverage

Question 1

Debt-to-Asset Ratio

Answer 1

Debt/Assets = Debt/(Debt + Equity)

Measures: What percentage of a company’s assets are financed by debt

Good = A lower ratio less than 1 is good (means less debt being used)

Question 2

Equity Multiplier

Answer 2

Total Assets/Total Equity = (Debt + Equity)/ Equity

Measures: Proportion of a company’s assets financed by shareholder’s equity

Greater than 1 = more debt being used

Closer to 1 = more reliance on equity for financing

Question 3

Times-Interest-Earned Ratio

Answer 3

EBIT/(Interest Expense)

Measures: ability to meet interest obligations on outstanding debt

Good = higher the better (means more capable of making interest payments)