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  • 1.  Benchmarks and Pro forma Statements: Debt Ratio

    Posted 06-22-2019 09:37 AM

    Shovel Makers Company (SMC) has created a pro forma income statement and pro forma balance sheet. Depreciation for the year was $750,000 and new equipment costing $2,475,000 was purchased. Dividends of $1,500,000 were paid to the 100,000 shares outstanding. Below is SMC's pro forma income statement and pro forma balance sheet:

    Below are ratio benchmarks that SMC management would like to achieve:

    Which benchmarks will not be reached based on the pro forma financial statements?

    Below is the calculation of SMC's ratios:


    The answer is QR, CR and debt ratio why is this when the debt ratio is achieved and actually crossed the mark. 

    is it because well debt ratio means higher leverage, something the firm must control? 



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    Rituparni Pinisetti
    Student
    Bangalore
    India
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  • 2.  RE: Benchmarks and Pro forma Statements: Debt Ratio

    Posted 06-23-2019 01:10 AM
    debt ratio is better when it's small 
    that means it should achieve a goal of 20% or below
    not more

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    Hassan Ali Awad Alkhabbas
    Student
    Muscat
    Oman
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    Original Message


  • 3.  RE: Benchmarks and Pro forma Statements: Debt Ratio

    Posted 06-23-2019 03:45 AM
    Hi Ritu,

    Thank you for this interesting question.

    I'm recollecting this topic I had studied in part 1 section B topic 6. Top level planning & analysis.

    Debt means a liability to the company. Since the debt ratio increases it will increase the financial leverage by increasing assets but only for a shorter time phase. This is because the company will be paying interest and it should repay the complete debt at any future time frame. So increase in debt ratio is not a good future for the company at the same time we should consider many other factors also before deciding. factors like where this borrowed fund used etc.


    Thanks,
    Jagan M


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    JAGAN MANIKANDAN
    Accountant
    DUBAI
    United Arab Emirates
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    Original Message