Table of Contents
- 1 What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?
- 2 What factors should be considered in determining the capital structure of a company?
- 3 What factors must be considered for additional capital?
- 4 What is a good interest coverage ratio?
- 5 What is the need to maintain optimum working capital?
- 6 How financial ratios are used in financial analysis?
- 7 How do you calculate the interest coverage of a company?
- 8 What is the bad Interest Coverage Ratio for a company?
What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?
In addition to a consideration of tax effects, financial distress costs, agency costs, the business risk facing the firm, EBIT-EPS analysis, and cash insolvency analysis, there are additional factors normally considered as a firm makes its capital structure decisions.
What are some factors to consider in evaluating a company’s ability to make payments on outstanding debt?
Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.
What factors should be considered in determining the capital structure of a company?
Factors determining capital structure are given below −
- Trading on equity.
- Degree of control.
- Flexibility of financial plan.
- Choice of investors.
- Capital market condition.
- Period of financing.
- Cost of financing.
- Stability of sales.
What should be included in financial analysis?
A proper analysis consists of five key areas, each containing its own set of data points and ratios.
- Revenues. Revenues are probably your business’s main source of cash.
- Profits.
- Operational Efficiency.
- Capital Efficiency and Solvency.
- Liquidity.
What factors must be considered for additional capital?
It depends upon operating cost; higher operating cost means higher business risk. The total risk depends upon both financial as well as business risk. If firm’s business risk is low then it can raise more capital by issue of debt securities whereas at the time of high business risk it should depend upon equity.
What is a good debt to equity ratio for retail?
around 1 to 1.5
A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.
What is a good interest coverage ratio?
Generally, an interest coverage ratio of at least two (2) is considered the minimum acceptable amount for a company that has solid, consistent revenues. In contrast, a coverage ratio below one (1) indicates a company cannot meet its current interest payment obligations and, therefore, is not in good financial health.
Which one of the factor does not determine the capital structure?
Solution(By Examveda Team) Composition of the current assets does not affect the capital structure of a company. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.
What is the need to maintain optimum working capital?
There is no standard rule for an Optimum Working Capital. The working capital requirements vary from industry to industry. Traditionally, Current Ratio (Current Assets: Current Liabilities) of 1.5 to 3 is considered to be comfortable liquidity position.
Why are ratios important in financial analysis?
Ratios measure companies’ operational efficiency, liquidity, stability and profitability, giving investors more relevant information than raw financial data. Investors and analysts can gain profitable advantages in the stock market by using the widely popular, and arguably indispensable, technique of ratio analysis.
How financial ratios are used in financial analysis?
Ratio analysis compares line-item data from a company’s financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
What does the interest coverage ratio measure?
The interest coverage ratio measures a company’s ability to handle its outstanding debt. It is one of a number of debt ratios that can be used to evaluate a company’s financial condition. A good interest coverage ratio is considered important by both market analysts and investors,…
How do you calculate the interest coverage of a company?
Calculating the Interest Coverage Ratio. The interest coverage ratio is calculated by dividing earnings before interest and taxes (EBIT) by the total amount of interest expense on all of the company’s outstanding debts. A company’s debt can include lines of credit, loans, and bonds.
How do you calculate debt-to-equity ratio?
The ratio is calculated by dividing EBIT by the company’s interest expense—the higher the ratio, the more poised it is to pay its debts. Creditors can use the ratio to decide whether they will lend to the company. A lower ratio may be unattractive to investors because it may mean the company is not poised for growth.
What is the bad Interest Coverage Ratio for a company?
A bad interest coverage ratio is any number below one as this means that the company’s current earnings are insufficient to service its outstanding debt.