Question

Deliberate what a company subject to a debt-to-equity ratio covenant might to do to reduce the ratio so that it does not exceed the bank’s stipulated ratio. (Hint: Abandon conformance to GAAP when considering your post).

Answer 1

1)Any action that would reduce the debt or increase the stock(Shares) will ultimately reduces the debt-equity ratio of the company.

2) There are many legitimate and illegimate ways to reduce this ratio.the illegitimate ways are not just anti-GAAP:this involves the fraud

3)Legitimately, a company can offer an incentive Eg: sweetnerto the convertible debt holders,to induce them to convert the present debt they hold to stock there by decreasing the ratio.

4)Most simplest way to reduce debt equity ratio is to make an additional / fresh issue of stock to the public/through private placement

5)More over the company could issue a Employee stock options with favourable Exercise price so that employees can exersise their right with in the vesting period and there by reducing the debt-equity ratio.

6) the most logical step to reduce the debt euity ratio is incresing sales and this can be possible only throgh raising prices and reduction in costs and extra cash genarated can be used to pay off the debts

7) another way/measue the company can reduce the debt euity ratio is through effective inventory management system.

But illegitemately there are many ways in which company can reduce their debt equity ratio.some of them are:

a)Incresing the revenues and decreasing the expenses in oreder to increase equity since net income is part of equity it obvisly increse equity

b)crediting some of its debt debts to sales account by debiting some of the debts ETC.,