What does a debt-to-equity ratio of 26% indicate about a company's capital structure?

What does a debt-to-equity ratio of 26% indicate about a company's capital structure?

• A. The company is heavily financed by debt
• B. The company has an even balance of debt and equity
• C. The company is primarily funded by shareholders' equity
• D. The company has negligible debt

Answer: (C)

A debt-to-equity ratio of 26% indicates that for every dollar of equity, there is 26 cents of debt. This relatively low percentage reflects a capital structure that is primarily funded by shareholders' equity, suggesting that the company relies more on its own equity than on borrowed funds to finance its operations. This ratio provides insight into the financial leverage of the company. A lower debt-to-equity ratio typically signifies less financial risk, as the company is not heavily reliant on debt to fuel its growth. Therefore, the decision to classify the company as primarily funded by shareholders' equity aligns with the understanding that a 26% ratio is indicative of conservative financing strategies where equity outweighs debt.

A debt-to-equity ratio of 26% indicates that for every dollar of equity, there is 26 cents of debt. This relatively low percentage reflects a capital structure that is primarily funded by shareholders' equity, suggesting that the company relies more on its own equity than on borrowed funds to finance its operations.

This ratio provides insight into the financial leverage of the company. A lower debt-to-equity ratio typically signifies less financial risk, as the company is not heavily reliant on debt to fuel its growth. Therefore, the decision to classify the company as primarily funded by shareholders' equity aligns with the understanding that a 26% ratio is indicative of conservative financing strategies where equity outweighs debt.