Question 17 (1 point) Debt Management Ratios You are considering a stock investm

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Question 17 (1 point) Debt Management Ratios You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. Lotsof Debt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. Lotsof Equity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two frms? LotsofDebt: 10%, 10 times, 9 times, respectively; LotsoEquity: 90%, 1.11 times, .11 11 times, respectively 1) 2) LotsoDebt: 90%, 1.11 times, .1111 times, respectively; 3) LotsofDebt: 10%,1.11 times,.1111 times, respectively; 4) LotsofEquity: 10%, 10 times, 9 times, respectively Lots°Equity: 90%, 10 times, 9 times, respectively LotsofDebt: 90%, 10 times, 9 times, respectively; LotsofEquity: 10%, 1.11 times. . 1111 times. resnectively

Explanation / Answer

Therefore, given the above values, Option 4 is correct.

Ratios Debt ratio = Debt / Total Assets Equity Multiplier = Total Assets / Equity Debt to Equity ratio = Debt / Equity LotsofDebt $90 m / $100 m = 0.90 or 90% $100 m / $10 m = 10 times $90 m / $10 m = 9 times LotsofEquity $10 m / $100 m = 0.10 or 10% $100 m / $90 m = 1.11 times $10 m / $90 m = 0.1111 times

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