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 $35.25 million in assets with $32.75 million in debt and $2.50 million in equity. LotsofEquity, Inc. finances its $35.25 million in assets with $2.50 million in debt and $32.75 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

debt ratio= debt/assets

lots of debt= 32.75mn/35.25=92.91%
lots of equity=2.5/35.25=7.69%

Equity multiplier=Assets/equity
equity=assets-debt

lots of debt= 35.25/(2.5)=14.1
lots of equity=35.25/32.75=1.08

debt ot equity

lots of debt= 32.75mn/2.5=13.1
lots of equity=2.5/32.75=0.08

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