Debt to equity ratio

Most feasibility studies involve debt and equity. In the section on Economics it was assumed that there was a debt and interest to be paid. The amount of debt, or debt to equity ratio, varies widely from company to company. Some companies assume 100% equity and require the project to meet their set criteria on the entire investment. In this case all borrowings are considered to be at the corporate level, which then provides 100% of the funds to each project. In other companies, particularly utilities, the debt at the project level can be as high as 75% or more. 

Banks are not in business to take risks. They rent money and do everything they can to insure the return of their principal as well as the interest. Elaborate rating systems have been developed to measure each company s ability to repay its loans. One criterion is the debt to equity ratio. The higher the debt the more risk in a loan, and the higher the interest rate. 

Other ratios measure creditworthiness. One such measure is the debt-to-equity ratio ... 

Generally, lenders like to loan money to those who have more to lose in bankruptcy than they do, and debt-to-equity ratios less than 1 ensure this. 

Which firms in Section 7.2 have higher debt-to-equity ratios than Air Products ... 

Table 8.29 Return on Equity and Debt-to-Equity Ratio for Several U.S. Industries 1996...

Industry Return on equity (%) Return on assets (%) Debt-to-equity ratio... 

Capital structure is concerned with the ratio of borrowed capital to owner s equity. When inflation is low and the economy is stable, it is frequently cheaper to use borrowed money, if a company can secure lenders. However, a highly leveraged company—that is, one with a high debt-to-equity ratio—faces downside risk when business is bad. Stockholders receive high dividends when profits are good but bondholders expect the interest and principal to be paid on time, with the threat to a firm of insolvency and bankruptcy. Section 8.4.3 shows the effect of debt-to-equity ratio on company operations. Financial officers of companies are concerned with the optimum debt-to-equity ratio. 

Another economic indicator, the debt-to-capital ratio, is defined as the long-term debt divided by the total capital. This ratio is an indication of how highly leveraged a company might be. The ratios for a selected industries are found in Table 8.33. The ratios for these companies have been relatively constant in the range of 0.27 to 0.42 over a 10 year period (1984-1994). As an example of how the debt-to-equity ratio affects the return on equity, let us consider two companies.. Company A has a debt-to-equity ratio of 0.35, and company B s ratio is 0.80 (see Table 8.34). Assume that the interest rate on debts is 10% and that each company earns 30 cents per dollar of capital before income tax and interest. The problem is solved by assuming that debt plus equity equals capital assets, which... 

Foreign subsidiaries of U.S. companies often have high debt-to-equity ratios. Why Why are parent firms less concerned about the risk for foreign subsidiaries than for the parent U.S. companies ... 

OTA estimated the weighted average cost of capital for the three samples based on the evidence summarized above. Because the control firms have much higher debt-to-equity ratios than do the pharmaceutical companies, OTA used parameter estimates that would tend to understate the cost of debt and overstate the cost of equity. The computed costs of capital are therefore biased in favor of a higher cost of capital in the pharmaceutical industry. 

Apart from a rating one could target the balance sheet as an indicator for bondholder value.Many evaluations of creditworthiness are based on financial ratios (e.g., debt to equity ratio, liquidity or profitability ratios).Measuring bondholder value in this way is always due to delay Balance sheets of listed corporations are published quarterly at... 

Debt-to-equity ratio Debt-to-assets/(l - Debt- = 0.6852/(1-0.6852) =... 

Much of this activity took place out of public view in the closed and largely unregulated world of hedge funds and investment banks. The investment banks were subject to modest debt-to-equity requirements that SEC promulgated to protect shareholders from fraud. At the urging of the big five investment banks, however, SEC in April 2004 relaxed the requirements to allow investment banks to use their models to set their own minimum capital reserves. As the banks poured more and more resources into mortgage-backed securities, leverage rose dramatically from debt-to-equity ratios of 12 1 to ratios of 30-40 1. With capital reserves at historic lows, the investment banks were in no position to survive the crisis of confidence that hit the industry in the late summer of 2008. ... 

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