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Debt Equity Ratio We look at an example that applies to both, individuals, such as...

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Accounting

Debt Equity Ratio

We look at an example that applies to both, individuals, such as ourselves, and companies. We will assume that we own a piece of real estate. This may be our primary residence, a rental property that we may have acquired, or a production facility or warehouse that the company may own. The vast majority of individuals that purchase a residence use mortgage financing. In our case lets assume that we checked the market value of the residence and it is $300,000. We also look at our mortgage statement and see that we still owe the mortgage company $200,000, which means our equity in this home is $100,000, half of what we owe to the bank. In financial terms that means our debt-equity ratio is 2. Discuss with each other under which circumstances this is a good or at least acceptable situation, and under which circumstances you would be concerned by the fact that you still owe the bank such a significant amount.

Discuss the risks involved in owing the bank such a significant amount of money and why this may be an acceptable and even a good situation.

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