Problem 4-21 Leverage (LO3) A firm has a long-term debt-equity ratio of .4. Shar

Question

Problem 4-21 Leverage (LO3)

A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $1 million. Current assets are $200,000, and the current ratio is 2. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)

  Total debt ratio

A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $1 million. Current assets are $200,000, and the current ratio is 2. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)

Explanation / Answer

Computation of Total debt ratio

Total debt ratio = Total debt / Total assets

Current ratio = Current assets / Current liabilities

= 200000 / Current liabilities = 2

Current liabilities = 100000

total liabilities = Current liabilities + non current liabilities

= 100000 + (long term debt + share holders equity)

= 100000 + (100000*4/5 + 100000*1/5)

= 200000

total debt ratio = 80000/ 200000 = 0.4

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