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 $34.00 million in assets with $31.00 million in debt and $3.00 million in equity. LotsofEquity, Inc. finances its $34.00 million in assets with $3.00 million in debt and $31.00 million in equity.

Calculate the debt ratio. (Round your answers to 2 decimal places.)

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 $34.00 million in assets with $31.00 million in debt and $3.00 million in equity. LotsofEquity, Inc. finances its $34.00 million in assets with $3.00 million in debt and $31.00 million in equity.

Explanation / Answer

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 $34.00 million in assets with $31.00 million in debt and $3.00 million in equity. LotsofEquity, Inc. finances its $34.00 million in assets with $3.00 million in debt and $31.00 million in equity.

Debt Ratio

Lots of Debt =31/34 = 91.18%

Lots of Equity = 3/34 = 8.82%

equity multiplier= Total Assets / Total Stockholders' Equity

Lots of Debt =34/3 = 11.33

Lots of Equity =34/31 = 1.10

debt-to-equity

Lots of Debt =31/3 = 10.33

Lots of Equity = 3/31 = 0.10

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