06-06-2009, 06:10 PM
Irfan , The term <b>Leverage ratio</b> (also called capital structure ratio)is used by the lender. The long term lenders/creditors would judge the soundness of the borrower company on the basis of the long term financial strenght in term of its ability to pay the interest regularly as well as principal payment , when it is due.
For the judgement of the borrower company, lender uses <b>Debt Equity Ratio</b>, which is calculates by the following formula, <b>DEBT / DEBT + EQUITY</b>, if the use of debt is more than the prudential regulation's requirement then lender will hasitate to approve the loan furthermore lender will understand the ability (of the borrower) to pay the interest payment & principal.
Other kinds of Leverage ratios are 1. Financial Leverage 2. Operating Leverage & 3. Combined leverage. they will be discussed if i am required to do so.
<b>Impairment loss arises,</b> when carrying value of an asset exceeds its recoverable amount at the balance sheet date,
EXAMPLEIf a company has Equipment, which has a cost of (let's assume) Rs. 500,000, when it is cheaked for impairment test then it is found by the company that equipment has a recoverable amount of Rs. Rs.350,000 , then it means that there is an impairment loss of Rs.150,000 ( 500,000 - 350,000)
<b>Sunk cost</b> is the cost which has been incurred in the past & irrelevant for future decision making,
EXAMPLE A company wants to reduce its product cost & wants to purchase a new machine and for this purpose it conducts a research (which has a cost of Rs.25,000) after research it will either accept the new machine ( if it is beneficial) or reject if it is not preferable to buy that machine but in both cases ( whether accepts or rejects) Rs. 25,000 will be irrelevant for the current decision & will be treated as a sunk cost, that is not recoverable.
My email address is [email protected]
Best Regards,
For the judgement of the borrower company, lender uses <b>Debt Equity Ratio</b>, which is calculates by the following formula, <b>DEBT / DEBT + EQUITY</b>, if the use of debt is more than the prudential regulation's requirement then lender will hasitate to approve the loan furthermore lender will understand the ability (of the borrower) to pay the interest payment & principal.
Other kinds of Leverage ratios are 1. Financial Leverage 2. Operating Leverage & 3. Combined leverage. they will be discussed if i am required to do so.
<b>Impairment loss arises,</b> when carrying value of an asset exceeds its recoverable amount at the balance sheet date,
EXAMPLEIf a company has Equipment, which has a cost of (let's assume) Rs. 500,000, when it is cheaked for impairment test then it is found by the company that equipment has a recoverable amount of Rs. Rs.350,000 , then it means that there is an impairment loss of Rs.150,000 ( 500,000 - 350,000)
<b>Sunk cost</b> is the cost which has been incurred in the past & irrelevant for future decision making,
EXAMPLE A company wants to reduce its product cost & wants to purchase a new machine and for this purpose it conducts a research (which has a cost of Rs.25,000) after research it will either accept the new machine ( if it is beneficial) or reject if it is not preferable to buy that machine but in both cases ( whether accepts or rejects) Rs. 25,000 will be irrelevant for the current decision & will be treated as a sunk cost, that is not recoverable.
My email address is [email protected]
Best Regards,
