Solvency Ratios

[archived_user]

I am a little confused about using interest-bearing vs. non-interest-bearing liabilities in solvency ratios. Some chapters use total debt / total equity for D/E ratio, while some use only interest-bearing debt for D/E. What is a good rule for this? Can someone please comment on this? I’ve also noticed that curriculum explicitly states “in this reading, debt is defined as…”. However, what will I do in the exam? I am assuming that the exam won’t tell me that this question is from XYZ reading so use ABC type of debt!
Thanks in advance.

 

[archived_user]

Debt bears interest; there’s no difference between “total debt” and “interest-bearing debt”.
Total liabilities, on the other hand, can be different from total debt, as not all liabilities bear interest.

 

[archived_user]

Thanks S2000magician. So, my question is that how do I know whether I should use Liabilities in D/E or Interest-bearing Debt? Should I conclude from your response that we never use total liabilities (which might include non-interest bearing current liabilities) for D in D/E ratio? I am curious. I am asking because if we think of the definition of leverage ratio = A/E, then this implicitly includes liabilities, which might include non-interest bearing liability.

 

[archived_user]

So, I struggled with this in L1 as well. The ratios are as you define them, and the can be defined differently. I’d look for the definitions in the cirrriculum and use them. And hope for the best.

 

[archived_user]

To calculate the D/E ratio, you should use total debt or total liabilities (the two are equal) unless the question states specifically using interest-bearing or non-interest-bearing debts.
Here is the link for you to check it out:
https://www.cfainstitute.org/learning/products/…/corporate_finance_cha...

 

[archived_user]

sinh nguyen wrote: To calculate the D/E ratio, you should use total debt or total liabilities (the two are equal) unless the question states specifically using interest-bearing or non-interest-bearing debts.
Here is the link for you to check it out:
https://www.cfainstitute.org/learning/products/…/corporate_finance_cha...

With all due respect, you’re wrong here.
According to the curriculum, “In this reading, we take total debt in this context to be the sum of interest-bearing short-term and long-term debt.”