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Corporate Finance Application

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Accounting
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Colorado State University
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Running head: CORPORATE FINANCE APPLICATION FIN8 1
Corporate Finance Application FIN8
Name
Institution
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CORPORATE FINANCE APPLICATION FIN8 2
Corporate Finance Application FIN8
PART A: DEBT RATIOS AND PROFITABILITY RATIOS
Debt Ratio
The debt ratio measures the extent to which a firm uses debt to finance its projects. It is a
proportion of a firm’s assets that are financed using debt capital.
Debt Ratio =
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The table below shows the debt ratio for Smith Company Inc. for years ended on 31
December 2015 to 31 December 2018.
31/12/2018
31/12/2017
31/12/2016
31/12/2015
Total Debt
32,244,000
37,810,000
34,452,000
32,699,000
Total Assets
77,042,000
78,274,000
72,604,000
68,523,000
Debt Ratio
0.4185
0.4830
0.4745
0.4772
From the table above, the debt ratios for the four years from 2015 to 2018 are 0.4772,
0.4745, 0.483, and 0.4185. The acceptable debt ratio varies by the industry a company is
operating. The lower the ratio, the better the performance of the company. However, a high ratio
may indicate that a firm is facing a risk of a loan default if the debt interests suddenly increase. A
ratio higher than 1 implies that a great portion of the firm’s assets is funded by debt. On the other
hand, a debt ratio of less than 1 means that a great proportion of the firm’s assets are being
funded by equity.

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Running head: CORPORATE FINANCE APPLICATION – FIN8 Corporate Finance Application – FIN8 Name Institution Course Tutor Date 1 CORPORATE FINANCE APPLICATION – FIN8 2 Corporate Finance Application – FIN8 PART A: DEBT RATIOS AND PROFITABILITY RATIOS Debt Ratio The debt ratio measures the extent to which a firm uses debt to finance its projects. It is a proportion of a firm’s assets that are financed using debt capital. Debt Ratio Total Debt = Total Assets The table below shows the debt ratio for Smith Company Inc. for years ended on 31 December 2015 to 31 December 2018. 31/12/2018 31/12/2017 31/12/2016 31/12/2015 Total Debt 32,244,000 37,810,000 34,452,000 32,699,000 Total Assets 77,042,000 78,274,000 72,604,000 68,523,000 Debt Ratio 0.4185 0.4830 0.4745 0.4772 From the table above, the debt ratios for the four years from 2015 to 2018 are 0.4772, 0.4745, 0.483, and 0.4185. The acceptable debt ratio varies by the industry a company is operating. The lower the ratio, the better the performance of the company. However, a high ratio may indicate that a firm is facing a risk of a loan default if the debt interests suddenly increase. A ratio higher than 1 implies that a great portion of the firm’s assets is funded by debt. On the other hand, a debt ratio of less than 1 means that a great proportion of the firm’s assets are being funded by equity. CORPORATE FINANCE APPLICATION – FIN8 3 Debt Equity Ratio The debt to equity ratio is a measur ...
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