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?

Solutions

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 1 year ago

Next > < Previous

Related Solutions

Liabilities can be listed as both long-term and short-term, based on the time frame for paying...

Liabilities can be listed as both long-term and short-term, based on the time frame for paying them. You have a notes payable which was issued to purchase inventory and it was issued on 10/15 and is for 90 days. Determine how to report this on balance sheet and support your reason for this reporting. The company knows they cannot pay this note in 90 days and is working to convert it to be payable over 15 months. Does this change...

What are contingent liabilities, and how do they differ from other short- or long-term liabilities? Which...

What are contingent liabilities, and how do they differ from other short- or long-term liabilities? Which types of contingent liabilities need to be disclosed, and where do they appear in the financial statements. Give examples of all three types of contingencies.

What is the impact of using long term liabilities to meet short term needs?

What are the characteristics of short-term and long-term liabilities? What are some examples of each that...

What are the characteristics of short-term and long-term liabilities? What are some examples of each that you own? How do businesses account for at least two long-term liabilities?

What are alcohol's effects on the liver, both short-term and long-term?

How would you distinguish general long-term liabilities from other long-term liabilities of the government? How would...

How would you distinguish general long-term liabilities from other long-term liabilities of the government? How would financial reporting of general long-term liabilities' reporting differ from other long-term liabilities? Explain. How would you describe the purpose and budgeting (if required or not) of a debt service fund? Explain. How would you explain the concepts of debt limit and borrowing power or debt margin connections? Explain.

Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities. Illustrate your answer with journal entries as...

Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities. Illustrate your answer with journal entries as examples.

Calculate the return for investing for ZIP pay company both short term and long term and...

Calculate the return for investing for ZIP pay company both short term and long term and identify the main causes of its volatility in return over the corresponding holding period. The discussion of volatility should consider economic-wide and firm-specific factors.

Calculate the return for investing for ANZ company both short term and long term and identify...

Calculate the return for investing for ANZ company both short term and long term and identify the main causes of its volatility in return over the corresponding holding period. The discussion of volatility should consider economic-wide and firm-specific factors.

1. The IFRS definitions of current and long-term liabilities are much different than the U.S. GAAP...

1. The IFRS definitions of current and long-term liabilities are much different than the U.S. GAAP definitions. T/F 2. The face value of a bond is $75,000, its stated rate is 77%, and the term of the bond is five years. The bond pays interest semiannually. At the time of issue, the market rate is 88%. Determine the present value of the bonds at issuance. Present value of $1: 4% 5% 6% 7% 8% 5 0.822 0.784 0.747 0.713 0.681...

Subjects