Imagine you are planning to raise capital for the firm, you are wary about shareholders, which...

Imagine you are planning to raise capital for the firm, you are wary about shareholders, which accounting ratios could address the concerns of those stakeholders regarding efficiency of the assets and cashflow? Explain in detail.

Expert Solution

When we are raising the capital for the firm then these capital can either be the debt capital or the equity capital & it'll be affecting the accounting ratios and we need to consider those ratios before we will be borrowing into the different type of capital.

When we are going the debt capital it would mean that, there will be a higher earnings for the shareholders and better use of the Asset if the company is able to generate a higher return on Capital than cost of debt, it will be able to formulate into a higher return on asset because the company will be able to maximize its return on assets.

When the company is not able to generate a higher return on capital than the cost of capital, then it would be leading to lower effectiveness in use of the Asset and then the company should be trying to go for the equity capital and these equity capital will also be having the impact on the overall profitability of the company because the number of shares will be increasing and the profitability of the company will remaining the same so there should be an overall analysis of various prospect before determination of source of the capital and the nature of the capital along with the cost of the capital and rate of return of the company and then the manager should be deciding upon which capital to borrow

jeff jeffy answered 2 years ago

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