Chapter 11 is all about liabilities, or debts, both short-term debts and long-term ones. How much...

Chapter 11 is all about liabilities, or debts, both short-term debts and long-term ones. How much debt is comfortable for you and how much debt is advisable for a small company?

Expert Solution

Small Companies can have debt in the ratio of 1 to 1.5 to Equity and can also have maximum of 2

Lesser the Debt equity ratio safer the company.

Debt is more comfortable when it is half of the Company's equity and Retained Earnings.Over that it becomes a little burden.

Debts help in gaining some tax benefits by way of deduction of Interest expenses for tax reduction purposes

.Debt is needed for growth and would be safe if Cost of debt is lesser than Internal rate of return that company generates by investing its own funds in various projects.

Short term debts replayable in 12 months should be within the liquidity (ability of the company to pay funds using liquid assets in operating cycle)of the company. Lesser the Short term debts more higher the Current ratio and Liquid ratio.

Long term debts carry Interest and should be availed only if it is needed for operational growth of the business where Projected returns will exceed Cost of finance

In Such cases Debts are comfortable

ekkarill92 answered 2 years ago

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