The company controller asked Jade to determine if it could borrow more money for an expansion project. When she calculated a leverage ratio, she determined that the company already had 1.5 times as much debt as equity. Do you agree with her assessment that the company should back off with borrowing more funds at this time?
A) Yes, but if the company would increase sales, it could go ahead with borrowing more funds.
B) Not necessarily. She should investigate the debt to equity ratios of other firms in the same industry.
C) Yes, but the firm should pursue equity investment until the ratio equals 1:1.
D) Not necessarily. In poor economic times, it is good financial strategy for a firm to be highly leveraged.

Question

Quizplus · Accepted Answer

It is good strategy to compare your firm's debt ratios with other firms in the same industry. Debt financing is more acceptable in some industries than in others. However, in a poor economic climate, too much debt may be very detrimental to a company's existence.

The Company Controller Asked Jade to Determine If It Could