Ratios

Question 1

Please explain the debt/asset ratio

Answer 1

It’s = total liabilities/ total assets

It tells you what part of the total assests is owed to the lenders, and if the ratio = 1, liabilities equals assets (no safety margin); 1 there’s a problem (insolvent).

Question 2

Please explain the equity/asset ratio

Answer 2

Why: to measure what part of total assets is financed by the owner’s equity capital

= total farm equity / total farm assets

higher ratios are preferred, and cannot be higher than 1. Tells you the share of assets financed by the owner, capital

Question 3

Please explain the debt/equity ratio

Answer 3

why: to compare the proportion of financing provided by lenders with that provided by owner

total from liabilities / total owner equity

write the Debit to equity ratio as 0.99: 1

Lender financing compared to owner financing

• if the ratio is equal to 1, lender and the owner are providing an equal portion of the financing
• smaller values are preferred

Question 4

Please explain the concept of elasticity, how to calculate it.

Answer 4

 Elasticity is the sensitivity of the demand to changes in price
 Definition: Elasticity is the percentage change in quantity brought about by a percent change in price

E= (dQ/Qo)/(dP/Po); change in q and p compared to initial p and q.

The demand is elastic when E >= 1; and inelastic when is