Final answer:
The debt-to-asset ratio for Wildcat-Farms is 37.5%, and its debt-to-equity ratio indicates moderate use of debt. Tiger-Farms has an equity-to-asset ratio of 80%, indicating a conservative capital structure with less debt. Financial leverage ratios help in assessing a company's financial risk and capital structure.
Step-by-step explanation:
To calculate the debt-to-asset ratio for Wildcat-Farms, which has a debt-to-equity ratio of 0.60:1, we first recognize that for every $1 of equity, there is $0.60 of debt. Assuming that total assets are the sum of debt and equity, we represent equity as 1 part, debt as 0.6 parts, making total assets 1.6 parts. The debt-to-asset ratio is then obtained by dividing the debt portion by the total assets. So the debt-to-asset ratio is 0.60 / 1.6 = 0.375 or 37.5%. A debt-to-equity ratio of 0.60:1 means the company uses less debt than equity in its capital structure. A debt-to-asset ratio of 37.5% indicates that a large proportion of the company's assets are funded by equity.
For Tiger-Farms with a debt-to-asset ratio of 0.2:1, the equity-to-asset ratio would be calculated by subtracting the debt-to-asset ratio from 1, as the total assets are the sum of debt and equity. Thus, the equity-to-asset ratio is 1 - 0.2 = 0.8 or 80%. This shows that 80% of the company's assets are funded by equity, reflecting a conservative approach to leverage. The debt-to-asset ratio of 20% means only a small portion of the firm's assets are financed by debt.
The ratios mentioned above, debt-to-equity and debt-to-asset, as well as equity-to-asset, are all examples of financial leverage ratios. They are used to evaluate a company's financial structure and its ability to cover long-term debts. A lower debt-to-equity ratio generally indicates a more financially stable company with less risk for creditors. Conversely, higher ratios suggest more leverage, which could imply greater risk but may also provide the potential for higher returns.