A Debt includes credit extended by a financial institution or vendor in the form of a loan extended or money from a purchase made. As a company or institution analyses the capacity to take or service a debt, it is important to determine whether the it is secured or not. I positive, loan or debt has an asset as collateral which can be sold by the lender when payment is defaulted. (Martin, 2004)
Debt Capacity Analysis
Debt capacity refers to the ability to take debt and service efficiently and it is one of the methods lenders use to determine whether they should take money or not. This is done by using debt to revenue or equity ratios. (Richardson, 2006). Before a company or institution takes any loan, it is important to calculate the cost of servicing it, the period and the interest rate. It is only prudent to obtain a loan if the borrower can service the one without any major effect on its liquidity and business operations. When creating budgets, a company should factor in the interest to debt owed as an expense and also make a provision for accelerating the loan repayments.
Once a company or institution identifies its debt requirements and how to service such , an accurate calculation can be done. For example, if a company takes a debt with monthly repayments of $5000 while the loan is generating $10,000 in profits, then the dept would be easily serviced. Additionally, when interest rate rises or profits decline, the cost of servicing the loan becomes too much. (Martin, 2004). If a company gene- rates enough cash to pay off the loan at once, this will be a wise decision because it leaves the door open in case of future financial requirements.
The purpose of this paper is to analyze financial statements for the city of Fontana and determine its debt capacity using the following debt ratios. The city is situated approximately 50 miles to the east of Los Angeles. With a population of 199,900 people, it covers the area of 42.4 square miles…”
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