Myrtle Inc. begins Year One with liabilities of $456,000 and stockholders’ equit

Question

Myrtle Inc. begins Year One with liabilities of $456,000 and stockholders’ equity of $320,000. On the first day of Year One, the following occur: < Myrtle enters into an operating lease where it agrees to pay $50,000 per month for warehouse space. The contract is signed, and the first payment is made. < Myrtle borrows $103,000 in cash from Community Bank. < Several owners invest a total of $57,000 in cash into the company. a. Determine Myrtle’s debt-to-equity ratio before the above transactions occur. b. Determine Myrtle’s debt-to-equity ratio considering the effect of the above transactions.

Explanation / Answer

A. Debt-to-equity ratio before the above transaction:

Debt to equity = Total Liabilities ÷ Total Shareholder Equity.

Debt to equity = 456000 ÷ 320000 = 1.425

B. Debt-to-equity ratio considering the transaction :

456000 + 103000 = 559000

320000 + 57000 = 377000

Debt to equity = 559000 ÷ 377000 = 1.4828

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