Financial policy is typically assessed using which of the following metrics?
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Answer: C. Debt-equity ratio
Explanation
Financial policy determines how a corporation funds its assets through a mix of debt and equity. The debt-equity ratio explicitly measures this financing policy by comparing borrowed funds to owner capital. Higher debt-equity ratios indicate a more aggressive financial policy relying heavily on external borrowing. Capital structure decisions involve balancing the tax shields of debt against financial distress bankruptcy risks. The debt-equity ratio divides total liabilities by total shareholder equity from balance sheet records. Conservative financial policies utilize lower debt levels to maintain financial flexibility during downturns.
Corporate finance officers evaluate target debt-equity ratios when planning major capital expenditure programs. Credit rating agencies analyze financial policy metrics to assign credit scores to corporate bond issues. Investors examine leverage ratios to assess the risk profile of companies operating in cyclical industries. Option A refers to profit margin, which evaluates operational profitability rather than capital structure policy. Option B mentions total assets turnover, which measures asset utilization efficiency rather than debt financing. Option D is incorrect because the debt-equity ratio correctly measures corporate financial policy choices.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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