Question

Is there a limit to the debt​ ratio's value? ​ (select the best choice​ below.)

a. ​theoretically, the debt ratio cannot exceed 90 %. in​ practice, few creditors would extend loans to companies with exceedingly high debt ratios ​(greater than 70 %​).
b. ​theoretically, the debt ratio cannot exceed 70 %. in​ practice, few creditors would extend loans to companies with exceedingly high debt ratios ​(greater than 70 %​).
c. ​theoretically, the debt ratio cannot exceed 80 %. in​ practice, few creditors would extend loans to companies with exceedingly high debt ratios ​(greater than 70 %​).
d. ​theoretically, the debt ratio cannot exceed 100 %. in​ practice, few creditors would extend loans to companies with exceedingly high debt ratios ​(greater than 70 %​)?

Answer 1

Debt ratio = Liabilities/Assets

A scenario can arise when all the assets are financed through borrowing and others debts. In such a case, debt ratio will be 100%. However, its theoretically impossible to have a debt ratio being more than 100%. A large debt ratio shows the risk at which a company is in. In practice, a debt ratio of between 60 to 70% is considered normal. Any ratio above 70% would scare investors away.

Therefore, choice d. is the best choice.