Assuming the financial leverage ratios of Toro are: Year 2012 2011 2010 2009 2008 Ratios 4.88...
Assuming the financial leverage ratios of Toro are:
| Year | 2012 | 2011 | 2010 | 2009 | 2008 |
|---|---|---|---|---|---|
| Ratios | 4.88 | 3.72 | 3.51 | 3.19 | 2.74 |
What is the solvency of Toro for the past five years, assessed by financial leverage ratios in the assumption?
| Lower business risk as less assets are financed by debts. |
| Higher business risk as less assets are financed by debts. |
| Lower business risk as more assets are financed by debts. |
| Higher business risk as more assets are financed by debts. |
| No change of solvency for the past five years. |
Homework Answers
As you can see, there is clearly trend of increase in leverage ( financing assets with more debt) over the last 5 years for Toro. Financial leverage of 0.5 is generally considered to be ideal. However, its better to measure a firm's leverage ratios against past performance and with companies operating in the same industry to better understand the data.
With increase in Leverage, after a certain point it becomes difficult for the company to service its debt, which ultimately leaves the company insolvent (unable to pay debts). Solvency is the ability of a company to meet its long-term financial obligations. Hence it is advisable to maintain optimum financial leverage.
Ans: Higher business risk as more assets are financed by debts.
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Assuming the financial leverage ratios of Toro are:
Year
2012
2011
2010
2009
2008
Ratios
4.88...
Assuming the current ratios of Toro are: Year 2012 2011 2010 2009 2008 Ratios 0.91 1.28...
Assuming the current ratios of Toro are: Year 2012 2011 2010 2009 2008 Ratios 0.91 1.28 1.47 1.69 2.3 What is your observation of the liquidity of Toro for the past five years, on the basis of the current ratios in the assumption? Overall, the liquidity has been improving. Overall, the liquidity has been deteriorating. Overall, the liquidity has been unchanged. Overall, the liquidity has been very volatile. No discernible pattern at all.
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