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

Current Asssets/Current Liabilities = 2

200,000/Current Liabilites =2

Current Liabilities =100,000

Long term liabilties = 0.4 *1,000,000 = 400,000

So Total Liabilities = 100,000 + 400,000 =500,000

Total Assets equity + liability = 1,000,000+500,000 = 1,500,000

Hence Det ratio = 500,000/1,500,000 = 0.33

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