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 $34.75 million in assets with $32.50 million in debt and $2.25 million in equity. LotsofEquity, Inc. finances its $34.75 million in assets with $2.25 million in debt and $32.50 million in equity. Calculate the debt ratio. (Round your answers to 2 decimal places.) Calculate the equity multiplier. (Round your answers to 2 decimal places.) Calculate the debt-to-equity. (Round your answers to 2 decimal places.)

Explanation / Answer

Debt Ratio

Lots of Debt Inc.     93.53 %

Lots of Equity Inc      6.47%

Equity Multiplier

Lots of Debt Inc.     15.44 times

Lots of Equity Inc      1.07 times

Debt -to– Equity ratio

Lots of Debt Inc.     14.44 times

Lots of Equity Inc      0.07 times

Lots of Debt Inc.

Total Assets = $ 34.75 Million

Debt   = $ 32.50 Million

Equity = $ 2.25 Million

Debt Ratio = Total Debt / Total Assets = 32.50/34.75 = 0.935251 or 93.53% rounded off

Equity Multiplier = Total Assets / Equity = 34.75 /2.25 = 15.4444 or 15.44 times (rounded off)

Debt-to-equity ratio = Debt / Equity = 32.50/2.25 = 14.4444 or 14.44 times (rounded off)

Lots of Equity Inc.

Total Assets = $ 34.75 Million

Debt = $ 2.25 Million

Equity = $ 32.50 Million

Debt Ratio = 2.25/34.75 = 0.064748 or 6.47%

Equity Multiplier = Total Assets / Equity = 34.75/32.50 = 1.06592 or 1.07 times (rounded off)

Debt-to-equity ratio = 2.25/32.50 = 0.0692 or 0.07 times  

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