Explain the Debt-Asset Ratio.
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Model Answer
Debt-Asset Ratio is a leverage ratio that measures the proportion of a firm's total assets financed by total debt (long-term debt + current liabilities).
$$\text{Debt-Asset Ratio} = \frac{\text{Total Debt}}{\text{Total Assets}}$$
It indicates long-term solvency. A higher ratio means greater financial risk, as more assets are funded by borrowed funds.
Source: Chapter 10, Leverage/Capital Structure Ratios
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Explanation
- Examiners expect: definition, formula, and a brief interpretation — all three for full 2 marks.
- Remember: Total Debt = Long-term debt + Current liabilities; Total Assets = Permanent capital + Current liabilities.
- Don't confuse this with Debt-Equity Ratio — that compares debt to equity, not to assets.