Question

In: Accounting

Which of the following actions could a company's owners use to reduce its leverage? Select all...

Which of the following actions could a company's owners use to reduce its leverage?

Select all that apply.

A) Raise additional equity capital.

B) A co-owner sells all his shares in Comfy Home to another co-owner.

C) Sell PP&E at book value and use the cash to pay off creditors.

D) Pay off long-term debt.

E) Increase net profits (and thereby retained earnings).

F) Use short-term debt to pay off long-term loans.

Solutions

Expert Solution

Leverage ratio is a elationship between Debt and equity. The company should maintain an optimum relationship between debt and equity. A company cannot be wholly equity financed, it lead to lower EPS, higher debt risks company in case of non available cash to pay interest or repayment of debt.

Ways to recuce leverage are -

1. Raise additional equity capital

2. Pay off long-term debt.

3. Increase net profits (and thereby retained earnings).

A co-owner sells all his shares in Comfy Home to another co-owner - it does not effect debt equity ratio in any way.

Sell PP&E at book value and use the cash to pay off creditors - it can reduce debt equity ratio however it is not considered as better option since it will have impact on company's operations and it might effect in long run.

Use short-term debt to pay off long-term loans. - it will not impact debt equity ratio since short debt increases.

ekkarill92 answered 2 years ago
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