A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $.92 mil
ID: 2800807 • Letter: A
Question
A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $.92 million. Current assets are $380,000, and the current ratio is 2.0. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)
A firm has a long-term debt-equity ratio of .4. Shareholders’ equity is $.92 million. Current assets are $380,000, and the current ratio is 2.0. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)
Explanation / Answer
Debt-equity ratio = Long-term debt / Equity
0.4 = Long-term debt / $920,000
Long-term debt = 0.4 × $920,000 = $368,000
Current ratio = Current assets / Current liabilities
2 = $380,000 / Current liabilities
Current liabilities = $380,000 / 2
Current liabilities = Notes payable = $190,000
Total liabilities = $368,000 + $190,000 = $558,000
Total assets = Total liabilities + Equity = $558,000 + $920,000 = $1,478,000
Total debt ratio = $558,000/$1,478,000 = 0.38
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