CH 5 Accounting Leverage Ratios.txt

The flashcards below were created by user Anonymous on FreezingBlue Flashcards.

  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:
CH 5 Accounting Leverage Ratios.txt
2012-06-03 06:14:04

refers to the use of borrowed funds to generate returns for stockholders
Show Answers: