Question : Which of the following statements is incorrect?
Option 1: Debt equity ratio is calculated to assess the ability of the firm to meet its long-term liabilities.
Option 2: If the debt-equity ratio is more than that, it shows a rather risky financial position from the long-term point of view.
Option 3: debt-equity ratio of 1: 1 is considered safe.
Option 4: A high debt-equity ratio is a danger signal for long-term lenders.
Correct Answer: debt-equity ratio of 1: 1 is considered safe.
Solution : Answer = debt-equity ratio of 1: 1 is considered safe is incorrect
The ideal debt-to-equity ratio is 2:1. A debt-equity ratio of 1:1 may not necessarily be safe; it depends on the industry and financial circumstances. Generally, lower ratios indicate less risk, while higher ratios signal potential financial vulnerability. An ideal debt-equity ratio of 2:1 indicates a balanced capital structure, with twice as much equity financing as debt. This ratio suggests that the company has a moderate level of leverage, minimizing financial risk while still leveraging debt for growth opportunities. Hence, the correct option is 3.
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