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Homework answers / question archive / You are considering a stock investment in one of two firms (LotsofDebt, Inc
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 $30 million in assets with $29 million in debt and $1 million in equity. LotsofEquity, Inc. finances its $30 million in assets with $1 million in debt and $29 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.)
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
