CH 5 Accounting Leverage Ratios

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  1. Leverage
    • Leverage refers to using borrowed funds to
    • generate returns for stockholders.
    • lLeverage is desirable because it creates
    • returns for shareholders without using any of their money.

    • lLeverage increases risk by committing the
    • company to future cash obligations.
  2. Capital Structure
    Average Total Assets/ Average Stockholders’ Equity

    • Leverage
    • This ratio measures the extent to which a
    • company relies on borrowings (liabilities).
  3. Common Equity Leverage
    Net Income / Net Income + Interest Expense (1-tax rate)

    • Leverage
    • This ratio compares the return available to
    • the shareholders to returns available to all capital providers.
  4. Debt to Equity Ratio
    Average Total Liabilities/Average Shareholders’ Equity

    • This ratio compares liabilities to shareholders’ equity and
    • is another measure of capital structure leverage.
  5. Long-term Debt Ratio
    Long-Term Debt/ Total Assets

    This ratio measures the importance of long-term debt as asource of asset financing.

Card Set Information

Author:
 Giovanni
ID:
 156891
Filename:
 CH 5 Accounting Leverage Ratios
Updated:
2012-06-02 17:23:45
Tags:
Leverage accounting
Folders:

Description:
Leverage refers to using borrowed funds to generate returns for stockholders.
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