You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Question

Aniyah

Business

5 May, 13:27

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

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Answers (1)

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Daniella Lam · Answer 1

Cash coverage ratio = 2.6; debt-equity ratio = 0.3

Explanation:

Properly understood and applied target ratios are vital when making an informed investment in one's firm. Depending on the given case, the cash coverage ratio of 2.6 and dept equity ratio of 0.3 represent the best target ratios. However to show a sufficient ability to pay, the cash coverage ratio should be substantially greater than 1:1. A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others.