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Unformatted text preview: l pay $1.49 to every share outstanding. There are two credit policies which can also affect our balance sheet ‐ Accounts Receivable and Accounts Payable credit policies. Both are expressed in days. For example, 30 days A/R policy means that we give customers 30 days to pay our invoices. Are there tips to keep in mind? Keep the ratio of assets to equity (or leverage) between 33% and 66%. What does this mean? Any asset is paid for with a mix of debt and equity. Let's use a personal asset for discussion purposes. When a person buys a house, they make a down payment ‐ say 20%. The down payment is equity. That mix is 20% equity and 80% debt, or a leverage of 5.0. (For every dollar of asset, $0.20 would be in equity, so assets/equity is 5.0.) In business a leverage is 5.0 is very risky. It would be very difficult to make a profit after interest payments, and the risk of default is high. At 33% equity, our leverage is 3.0. Risk becomes more tolerable. At 50%, our leverage is 2.0 and comfort levels high. At 66% lenders are eager to lend...
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- Fall '06
- Business, Foundation Report