Final answer:
The debt ratios indicate that Kemp has a higher financial leverage than Braun, with Kemp's debt ratio of 1.0 meaning it has the same dollar amount of total liabilities and total assets, which makes this the correct option.
Step-by-step explanation:
The student's question revolves around the interpretation of debt ratios for two fictional companies, Braun and Kemp. These ratios reveal the extent to which each company finances its assets through liabilities as opposed to equity. A debt ratio greater than 1 indicates that a company has more liabilities than assets, might suggest higher financial leverage, and indicates a higher financial risk. If the debt ratio is less than 1, the company has more assets than liabilities.
Given that the debt ratio of Braun is 0.9 and Kemp is 1.0, it means that Braun has a mix of assets financed by both liabilities and some equity, whereas Kemp has its assets completely financed by liabilities, as their debt ratio equals 1. Therefore, Kemp has a higher degree of financial leverage, which means it is using more debt relative to equity in financing its assets. Kemp having less equity per dollar of assets than Braun can also be inferred from these ratios.
In the context of the Multiple Choice options provided:
• Kemp finances a relatively lower portion of its assets with liabilities than Braun. - Incorrect because Kemp has a debt ratio of 1.0, indicating that it uses liabilities to finance all its assets.
• Braun has higher financial leverage. - Incorrect since a ratio of 0.9 for Braun suggests less leverage compared to Kemp's 1.0.
• Kemp has less financial leverage. - Incorrect, as Kemp's debt ratio of 1.0 suggests higher leverage.
• Kemp has the same dollar amount of total liabilities and total assets. - Correct, the debt ratio of 1.0 indicates this scenario.
• Braun has less equity per dollar of assets than Kemp. - Incorrect, Braun's lower debt ratio indicates it has more equity per dollar of assets than Kemp.
Therefore, the correct option is Kemp has the same dollar amount of total liabilities and total assets.