Question

Tiggie's dog toys, incorporated, reported a debt-to-equity ratio of 1.25 times at the end of the year. If the firm's total assets at year-end were $26.80 million, how much of its assets are financed with debt and how much with equity?

Answer 1

To determine the amount of assets financed by debt and equity for Tiggie's dog toys, incorporated, with a total asset value of $26.80 million and a debt-to-equity ratio of 1.25, we calculate that approximately $14.89 million is financed by debt and $11.91 million by equity.

Step-by-step explanation:

Understanding Debt-to-Equity Ratio

The student's question is regarding how to calculate the amount of a company's assets that are financed by debt and equity, given the debt-to-equity ratio and the total assets value. To calculate the amounts financed by debt and equity, we need to use the debt-to-equity ratio formula: Debt-to-Equity Ratio = Total Debt / Total Equity. In the case of Tiggie's dog toys, incorporated, with a debt-to-equity ratio of 1.25 times, we can express this as:

1. Total Debt = 1.25 × Total Equity
2. Total Assets = Total Debt + Total Equity

Since the total assets are given as $26.80 million, we can set up the following system of equations:

1. $26.80 million = Total Debt + Total Equity
2. Total Debt = 1.25 × Total Equity

Solving these equations simultaneously, we get:

• Total Equity = $26.80 million / (1 + 1.25)
• Total Equity = $26.80 million / 2.25
• Total Equity = $11.91 million (approximately)
• Total Debt = 1.25 × $11.91 million
• Total Debt = $14.89 million (approximately)

Therefore, Tiggie's dog toys, incorporated finances $14.89 million of its assets with debt and $11.91 million with equity.