You are considering a stock investment in one of two firms (LotsofDebt, Inc. and

Question

You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $32.00 million in assets with $30.00 million in debt and $2.00 million in equity. LotsofEquity, Inc. finances its $32.00 million in assets with $2.00 million in debt and $30.00 million in equity.

Calculate the debt ratio. (Round your answers to 2 decimal places.)

Debt ratio

LotsofDebt % LotsofEquity %

Calculate the equity multiplier. (Round your answers to 2 decimal places.)

Equity multiplier LotsofDebt times LotsofEquity times

Calculate the debt-to-equity. (Round your answers to 2 decimal places.)

Debt-to-equity LotsofDebt times LotsofEquity times

Explanation / Answer

Answer:

Debt ratio = Total Debt /   Total Finance

                = $30 / $32

               = 93.75%

Equity Multiplier = Total assets / total equity

                            = $32 / $2

                            16 times

Debt –equity ratio = Total debt / Total Equity

                               $30 / $ 2

                             =     15%

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