How much debt is too much for an organization, and should more users of organizational data...

How much debt is too much for an organization, and should more users of organizational data use the combined degree of operating leverage versus operational and/or financial? min 200 words

Expert Solution

The Debt plays an essential role in the Company's net income because the company bears the less rate of interest on the cost of debt it takes. But the question is how much of the debt the company could have and after what limit of debt the company can suffer from loss.

So to conclude the maximum Debt taken by the company it is necessary to compare it with the Equity. The below mentioned formula should be used to get the ratio of debt to equity :

Debt to equity Ratio = Debt / Equity

Company needs to balance between the Debt and Equity.

The Sound ratio of debt to Equity is considered between 1 to 1.5 , suppose XYZ company has debt of $ 100000 and Equity of $80000

Debt to Equity = D / E

= $100000 / $80000

Debt to equity ratio = 1.25

This is considered to be good equity ratio and above 1.5 would be risky for the organization.

B part

Yes users like investors ,borrowers and shareholders of the company must use the combined degree of operational leverage and financial leverage.

Formula of Combined leverage :

Degree of Combined leverage

= % Change in EPS / % change in sales = Degree of operating leverage X Degree of financial leverage.

A company with a high level of combined leverage is seen as riskier than a firm with less combined leverage because high leverage means more fixed costs to the company.

jeff jeffy answered 3 months ago

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