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 $33.00 million in assets with $30.50 million in debt and $2.50 million in equity. LotsofEquity, Inc. finances its $33.00 million in assets with $2.50 million in debt and $30.50 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

Hi,

Please find the answer as follows:

Part A: Debt Ratio

Lots of Debt = 30.5/33*100 = 92.42%

Lots of Equity = 2.5/33*100 = 7.58%

Part B: Equity Multiplier

Lots of Debt = 33/2.5 = 13.2

Lots of Equity = 33/30.5 = 1.08

Part C: Debt to Equity Ratio

Lots of Debt = 30.5/2.5 = 12.2

Lots of Equity = 2.5/30.5 = .08

Thanks.

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