Question

A firm has a long-term debt-equity ratio of .3. Shareholders’ equity is $.96 million. Current assets are $306,000, and the current ratio is 1.8. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.) Total debt ratio ___.

Answer 1

0.32

Step-by-step explanation:

The formula to compute the debt ratio is shown below:

= Total debt÷ Total assets

where,

Total debt would be

= Current liabilities + Long term debt

where,

Long term debt ratio = Long term debt ÷ shareholder equity

0.3 = Long term liabilities ÷ $960,000

So, the long term liabilities would be

= $960,000 × 0.3

= $288,000

And, the current ratio would be equal to

Current ratio = Total Current assets ÷ total current liabilities

1.8 = $306,000 ÷ total current liabilities

So, the total current liabilities would be

= $170,000

So, the total debt would be

=$288,000 + $170,000

= $458,000

And, the total assets would be

= Total debt + shareholder equity

= $458,000 + $960,000

= $1,418,000

Now put these values to the above formula

So, the ratio would equal to

= $458,000 ÷ $1,418,000

= 0.32