Question

"Motivations for off-balance-sheet financing

Plummer Company pays $100 million in cash to acquire all of the stock of Stratton Company. The balance sheets of Plummer and Stratton just after the acquisition are as follows:

(in millions) Plummer Stratton
Current assets $200 $5
Noncurret assets 2,000 300
Investments in S 100 --
$2,300 $305
Liabilities $100 $303
Equity 2,200 2
Total $2,300 $305

Stratton's assets and liabilities are reported at amounts that approximate fair value at the date of acquisition, and there are no unreported net assets.

What is Plummer's debt to total assets ratio if it consolidates Stratton? Round to the nearest percent."

Answer 1

The debt to total assets ratio of Plummer Company after acquiring Stratton Company is 4.35%.

Step-by-step explanation:

The debt to total assets ratio is calculated by dividing the total debt by the total assets. In this case, the total debt of Plummer Company after acquiring Stratton Company is $100 million (the liabilities of Plummer), and the total assets is $2,300 million (the sum of the assets of Plummer and Stratton). Therefore, the debt to total assets ratio would be:

Debt to Total Assets Ratio = Total Debt / Total Assets * 100

= $100 million / $2,300 million * 100

= 4.35%