Question

the following information is available for both pulaski company and scott company at the current year-end. pulaski company scott company total assets $ 2,287,500 $ 1,156,500 total liabilities 871,500 565,500 total equity 1,416,000 591,000 required: compute the debt-to-equity ratio for both companies. which company has the riskier financing structure?

Answer 1

The debt-to-equity ratio for Pulaski Company is 61.5%, and for Scott Company, it is 95.7%. Scott Company has a riskier financing structure due to its higher debt-to-equity ratio.

Step-by-step explanation:

The debt-to-equity ratio is a measure of a company's financial leverage, calculated by dividing total liabilities by shareholders' equity. It's a useful indicator of the level of risk a company is taking on through its financing structure. To compute the debt-to-equity ratio for Pulaski Company and Scott Company, we use the provided year-end financial information.

For Pulaski Company, the debt-to-equity ratio is calculated as follows:

Total Liabilities / Total Equity = $871,500 / $1,416,000 = 0.615 or 61.5%

For Scott Company, the debt-to-equity ratio is calculated as:

Total Liabilities / Total Equity = $565,500 / $591,000 = 0.957 or 95.7%

Comparing both ratios, Scott Company has a higher debt-to-equity ratio, indicating a riskier financing structure compared to Pulaski Company. Generally, a higher ratio means that a company has been aggressive in financing its growth with debt, which can result in higher volatility in earnings and potential financial distress if not managed properly.