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.)

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

Explanation / Answer

LotsofDebt, Inc.
Debt = 30
Equity = 2
Assets = Debt + Equity = 30 + 2 = 32

Debt Ratio = Debt/Assets = 30/32 = 93.75%
Equity Multiplier = Assets/Equity = 32/2 = 16
Debt to Equity = Debt/Equity = 30/2 = 15

LotsofEquity, Inc.
Debt = 2
Equity = 30
Assets = Debt + Equity = 2 + 30 = 32

Debt Ratio = Debt/Assets = 2/32 = 6.25%
Equity Multiplier = Assets/Equity = 32/30 = 1.0666666667 = 1.07 (rounded to 2 decimals)
Debt to equity = Debt/Equity = 2/30 = 0.0666666667 = 0.07 (rounded to 2 decimals)

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