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 $37.50 million in assets with $33.50 million in debt and $4.00 million in equity. LotsofEquity, Inc. finances its $37.50 million in assets with $4.00 million in debt and $33.50 million in equity.

Calculate the debt ratio.

LotsofDebt, Inc. %

LotsofEquity, Inc %

Calculate the equity multiplier.

LotsofDebt, Inc. ______times

LotsofEquity, Inc ______times

Calculate the debt-to-equity.

LotsofDebt, Inc. ______times

LotsofEquity, Inc ______times

Explanation / Answer

Debt ratio of lots of debt = Debt/ Total assets

Debt ratio of lots of debt = 33.50/ 37.50

Debt ratio of lots of debt = 89.33%

Debt ratio of lots of Equity = Debt/ Total assets

Debt ratio of lots of Equity = 4/ 37.50

Debt ratio of lots of Equity = 10.67%

Part B:

Equity Multiplier of lots of debt = Total Assets/ Equity

Equity Multiplier of lots of debt= 37.50/ 4

Equity Multiplier of lots of debt = 9.38

Equity Multiplier of lots of Equity = Total assets/ Equity

Equity Multiplier of lots of Equity = 37.50/ 33.50

Equity Multiplier of lots of Equity = 1.12

Part C

Debt to Equity of lots of debt = Debt/ Equity

Debt to Equity of lots of debt = 33.50/ 4

Debt to Equity of lots of debt = 8.38

Debt to Equity of lots of Equity = Debt/ Equity

Debt to Equity of lots of  Equity = 4/ 33.50

Debt to Equity of lots of Equity = 0.12

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