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Question text Selected data from Kamal Company's financial statements is as follows: In $000's 2017 2016...

Question text

Selected data from Kamal Company's financial statements is as follows:

In $000's

2017

2016

Current liabilities

$ 5,130

$ 5,202

Long-term debt

1,419

1,322

Stockholders' equity

12,632

11,166

Interest and principal payments

300

400

Net income

2,430

2,280

Interest expense

196

172

Income taxes

1,837

1,524

Dividends paid

750

750


Kamal Company's debt-to-equity ratio was 0.52 to 1 in 2017 and 0.58 to 1 in 2016.

Which of the following statements is true concerning Kamal?

Select one:

A. The company appears to be in a weaker position at the end of 2017 to finance capital expenditures from cash flow generated by operating activities.

B. The company relied more on creditors for capital during 2017 than in 2016.

C. The company has a smaller percentage of capital from owners at the end of 2017 than at the end of 2016.

D. The company is improving its debt-to-equity ratio.

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Answer #1

Answer

  • The correct answer is Option ‘D’ The company is improving its debt to equity ratio.
  • Debt to Equity ratio = Total Liabilities / Total Stockholder’s Equity
  • The Debt to Equity ratio ratio has decreased from 0.58 to 0.52. Decrease in this ratio is a favourable trend and considered an ‘improvement’.
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