You are considering a stock investment in one of two firms (LotsofDebt, Inc

Computation of the debt ratio:-

Debt ratio = Total liabilities (Debt) /Total assets

For Lots of Debt Inc.;

Debt ratio = $29 / $30

= 96.67%

For Lots of Equity Inc.;

Debt ratio = $1 / $30

= 3.33%

Computation of the equity multiplier:-

Equity multiplier = Total assets / Total equity

For Lots of Debt Inc.;

Equity multiplier = $30 / $1

= 30 times

For Lots of Equity Inc.;

Equity multiplier = $30 / $29

= 1.03 times

Computation of the debt-to-equity ratio:-

Debt-to-equity ratio = Debt / Equity

For Lots of Debt Inc.:

Debt-to-equity ratio = $29 / $1

= 29:1

For Lots of Equity Inc.;

Debt-to-equity ratio = $1 / $29

= 0.03:1