Question

Choose a company traded on the New York Stock Exchange and analyze (i) how has it been financed (i.e. debt or equity) and (ii) which is the financing risk that may result from the company’s chosen debt ratio. This exercise assesses the following learning outcomes: • Outcome 1: Demonstrate a deep understanding of the theory and practices of financing a firm and its capital structure. • Outcome 2: Evaluate the financing risk that may result from the chosen debt ratio.

Answer 1

Let us take Amazon.com Inc as the chosen company for the given scenario.
(i)
The company's Total debt for the recent quarter is $91.4 billion and Debt to equity ratio is 123.97.
The Debt to equity ratio is used to evaluate a company's financial leverage and the way the company has been financed. It also measures the degree to which a company has been financing its operations through debt versus equity. A high ratio usually indicates that a company is having high risk.
Now it is clear that the debt-to-equity ratio measures a company’s debt relative to the equity, it is also used to measure the extent to which a company is taking on debt as a means of its operation.
So, we have a Debt to equity ratio of 123.97 which seems to be very high and a high ratio is associated with high risk and it means that the company (Amazon) has been aggressively being financed by debt, which is further being shown by a debt of $91.4 billion.

(ii)
As has been discussed in (i) above, the company's debt ratio of 123.97 is very high and hence poses a huge finance risk on the company as a whole. The company has been using a high debt to finance its operations and also the growth of the company is majorly dependent on the debt used. This poses a high interest burden on the company and also risks on the shareholders.