Neal Enterprises has no debt. Its current total value is $74.8 million. Assume t

Question

Neal Enterprises has no debt. Its current total value is $74.8 million. Assume the company sells $34.4 million in debt. Requirement 1: Ignoring taxes, what is the debt-equity ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Debt-equity ratio 0.85 Requirement 2: Assume the company's tax rate is 32 percent. What is the debt-equity ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Debt-equity ratio_______

Explanation / Answer

1)

Total Value =74.8 Million

Debt = 34.4

Equity = 74.8-34.4 = 40.4

Debt Equity Ratio = Debt/Equity

Debt Equity Ratio = 34.4/40.4

Debt Equity Ratio = 0.85

2)

Total Value without Leverage =74.8 Million

Debt = 34.4

Total Value with leverage = Total Value without Leverage + Debt*tax rate

Total Value with leverage = 74.8+34.4*32%

Total Value with leverage = 85.808

Equity = 85.808-34.4 = 51.408

Debt Equity Ratio = Debt/Equity

Debt Equity Ratio = 34.4/51.408

Debt Equity Ratio = 0.67

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