Equity Ratio

The debt ratio is similar to the debt-to-equity ratio. 

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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. 

Two other factors that need to be considered in project evaluation that are not expressly found in financial statements are inflation and debt-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. 

The financial crisis in the Far East during the late 1990s exposed the high debt levels of the petrochemical operations, which were not being serviced. This has forced restructuring of the industry in order to reduce debt levels. For instance some companies had debt/equity ratios of well over 300%. Since restructuring, these levels have been reduced. 

Assumed dept/equity ratio 60 40 depreciation 6%, 8% interest on depts, 16% ROI on equity. 

Figure 122 shows an estimate of ammonia production costs at various locations. In this figure the capital-related costs are based on a debt/equity ratio of 60/40. With 6 % depreciation of fixed assets and spare material, 8 % interest on debts and 16 % ROI on equity, corresponding to a total of about 16.5 % of the total capital involved. The total capital includes the LSTK price for plant and storage, cost of the off-sites for an industrialized site, in-house project costs, spare parts and catalyst reserves, working capital. 

Adapted from Kohan and Wilhelm (1980). Nonregulated industrial financing is 100% equity and 15% DCF-ROR regulated utility financing is 65/35 debt/equity ratio. 

The return-on-equity ratio is the net income after taxes and interest divided by stockholders equity. It measures the return on the equity capital invested in the firm. Since one of management s objectives is to earn the highest return for the stockholders, this ratio is probably the best measure of management s performance. 

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. 

Table 8.32 Debt/Equity Ratios for Selected Companies ...

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