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 $33.50 million in assets with $32.00 million in debt and $1.50 million in equity. LotsofEquity, Inc. finances its $33.50 million in assets with $1.50 million in debt and $32.00 million in equity.

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

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 $33.50 million in assets with $32.00 million in debt and $1.50 million in equity. LotsofEquity, Inc. finances its $33.50 million in assets with $1.50 million in debt and $32.00 million in equity.

Explanation / Answer

1. Debt ratio of Lots of Debt: Debt ratio = debt/total assets

= 32/33.5 = 0.9552 or 95.52%

Debt ratio of Lots of equity = debt/total assets = 1.5/33.5 = 0.0447 or 4.47%

2. Equity multiplier of Lots of Debt = total assets/equity = 33.5/1.5 = 22.33 times

equity multiplier of Lots of Equity = total assets/equity = 33.5/32 = 1.05 times

3. Debt equity ratio of Lots of Debt = debt/equity = 32/1.5 = 21.33 times

Debt equity ratio of Lots of equity = debt/equity = 1.5/32 = 0.47 times

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