What are the extraneous factors which impact the ability of a business to radically alter its debt equity mix?

Answer 1

debt\equity mix is an important ration b\c it gives the reader of financial documents the ability to quickly determine how liquid an entity is in the event that a business becomes insolvent or bankrupt. if you sold everything in the business what would be it's market value (not book value) to meet all demands from your creditors. this ratio that you seem concerned with is not relevant unless you are in 1 of 3 situations: 1st. In the event that someone is trying to buy your company and are trying to determine an appropriate value or "price" to buy your business. 2. In the event that you are borrowing money and a bank asks to see your financial statements. 3. In the event your company is listed on a publicly traded Stock Market and financial institutions are analyzing your companies strength. A more appropriate ratio for the latter situation would be a price\earnings ration which would give them information of how profitable your stock has been in the past. The only way to alter this d\e ratio is to purchase, invest, aquire, etc. capital goods or inventory that will retain some resale value (which most capital goods usally do) such as vehicles, computers, furniture, tractors, forklifts, inventory. Do you see? Equity is the part of your business that has tangible value or something you can touch. Others want you to have a healthy mix of the two so that they know they can sell everything and pay debts quickly with the worst case scenario. Sort of a street smart approach to doing business. Good luck.