ACC501 - Business Finance GDB No. 1 Solution and Discussion Spring 2018 Due Date: May 23, 2018 

Total Marks 5
Starting Date Wednesday, May 16, 2018
Closing Date Tuesday, May 22, 2018
Status Open
Question Title GDB
Question Description

Discussion Question:

 

Debt-equity (D/E) ratio indicates that how many times a corporation has external funds in comparison to its equity (internal funds). Generally, corporations try to maintain this ratio up to a reasonable range to be in sound financial position. A better D/E ratio ensures better-paying capacity of both principal and the interest.

 

Different industries have different benchmarks for this ratio.  For example, technology corporations have an industry standard of 2 times whereas manufacturing companies tend to have this particular ratio between 2 to 5 times. However, a higher ratio is considered favorable in case of banking and other development finance institutions (DFIs).

 

On the contrary, banks impose limitations on corporations while granting loans (through bank loan covenants) on the maximum debt-equity ratio.

 

You are required to discuss the following:

a) Why is a high debt-equity ratio of banks considered as favorable?

b) Why banks put limitations on the maximum D/E ratio of companies while sanctioning loans?

 

Important Instructions:

  1. Your discussion must be based on logical facts.
  2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  3. Obnoxious or ignoble answer should be strictly avoided.
  4. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

 

 For Detailed Instructions please see the GDB Announcement

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