Question

If a company has total assets of $1,700,000, current liabilities of $300,000, total liabilities of $1,200,000, common stock of $150,000 and total stockholders' equity of $500,000, what is its debt to equity ratio?

Answer 1

The debt to equity ratio for the company, calculated using the provided financial figures, is 2.4. This means the company has $2.40 in debt for every dollar of equity, indicating a more leveraged financial position.

Step-by-step explanation:

To calculate the debt to equity ratio for the company, you use the following formula: Debt to Equity Ratio = Total Liabilities / Total Stockholders' Equity. Given that the company has total liabilities of $1,200,000 and total stockholders' equity of $500,000, you can calculate the debt to equity ratio as follows: Debt to Equity Ratio = $1,200,000 / $500,000 = 2.4.

This means that for every dollar of equity, the company has $2.40 in debt, which can be interpreted as the company being more leveraged. It is important for businesses to maintain a balance between debt and equity to ensure financial stability. A higher debt to equity ratio often indicates higher risk for creditors and investors, but it also shows that a company may be aggressively financing its growth with debt.