Question

What are the common debt managanent ratios? what are the tradeoffs for a company to use leverage? Do you think older and mature companies are more likely or less likely to use debt than younger companies? Explain

Answer 1

Common debt management ratios:

Debt ratio

Financial leverage

Times Interest Earned

Tradeoff:-

At one side company gets the finance from the cheaper source because the cost of debt is lower than the equity. But this cost is fixed that means whether the company make profit or not the cost of debt means the Interest have to pay regardless of the firm's profit so it's increase the finance risk of the firm.

Do you think older and mature companies are more likely or less likely to use debt than younger companies? Explain

I think mature companies are more likely to used debt because the mature firm have more fixed income or we say regular income so they can pay off cost of debt or in way we can also say they have more ideal fund so they can pay cost of debt from retained earnings in the case of adverse situations. While the young firm's does not have regular income and also does not have much retained earnings accumulated so the old firm should use debt.