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The remaining long-term debt is used in the numerator of the long-term-debt-to-equity ratio. A similar ratio is debt-to-capital (D/C), where capital is the sum of debt and equity: D/C = total liabilities / total capital = debt / debt + equity The relationship between D/E and D/C is: D/C = D / D+E = D/E / 1 + D/E
The issue of equity, on the other hand, would signal some lack of confidence, or at least that the share is over-valued. An issue of equity may then lead to a drop in share price. (This does not however apply to high-tech industries where the issue of equity is preferable, due to the high cost of debt issue as assets are intangible. [4])
For example, the debt-to-equity ratio and interest coverage ratios are supplemental ways to see how leveraged a company is. Remember that a high debt-to-assets ratio isn’t necessarily a bad thing.
A firm facing debt overhang cannot issue new junior debt because default is likely. Moreover, more debt will make the problems of debt overhang worse not better. In addition, the firm's shareholders do not want to issue new stock because this forces shareholders to bear some of the losses that would have been borne by junior creditors.
Good debt is preferable because it builds value, but there are cases where bad debt is the best choice. For instance, using a loan to buy a reliable car to get you to and from work is a good use ...
Benefits of tapping your home equity to pay off debt. Taking out a home equity loan can free up room in your budget to pay down high-interest debts, among other benefits that include:
Debt (in the form of bonds) has some advantages over equity as a way of raising money, since it can have tax benefits and can enforce a cash discipline. The reduction in equity also makes the firm less vulnerable to a hostile takeover. Leveraged recapitalizations can be used by public companies to increase earnings per share.
The amount of tappable equity is also affected by the homeowner’s outstanding mortgage, as lenders typically limit all home-based debt (both the primary mortgage and new loans) to about 80% of ...