In considering equity and debt financing, which of the following statements is generally true?
A) The lower the measure of the long-term debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period.
B) Interest and dividend payments are not required to be made by the issuing company.
C) The higher the measure of the debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period.
D) Most companies prefer to have no debt and rely exclusively on equity financing.

Question

Quizplus · Accepted Answer

A higher measure of debt to equity ratio means that a company has more debt compared to equity, which increases the risk of default in the future if the company is unable to make debt payments. Therefore, the statement "The higher the measure of the debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period" is generally true. A lower long-term debt to equity ratio indicates a more conservative financing strategy, which may be preferred by some companies. However, it does not necessarily mean that the company will have difficulty meeting its obligations in the future. Interest and dividend payments are required to be made by the issuing company, regardless of whether they are financed through debt or equity. Lastly, while some companies may prefer to have no debt and rely solely on equity financing, others may choose to use a mix of both to achieve an optimal capital structure.

In Considering Equity and Debt Financing, Which of the Following