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CH 5 Accounting Leverage Ratios
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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.
Capital Structure
Average Total Assets/ Average Stockholders’ Equity
Leverage
This ratio measures the extent to which a
company relies on borrowings (liabilities).
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.
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.
Long-term Debt Ratio
Long-Term Debt/ Total Assets
This ratio measures the importance of long-term debt as asource of asset financing.
Author
Giovanni
ID
156891
Card Set
CH 5 Accounting Leverage Ratios
Description
Leverage refers to using borrowed funds to generate returns for stockholders.
Updated
6/2/2012, 5:23:45 PM
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