Question

You are considering a stock investment in one of two firms (Lotsof Debt, Inc. and LotsofEquity, Inc.), both of which operate in the same

industry. LotsofDebt, Inc. finances its $32.00 million in assets with $30.00 million in debt and $2.00 milion in equity. LotsofEquity, Inc.
finances its $32.00 million in assets with $2.00 million in debt and $30.00 million in equity.
Calculate the debt ratio. (Round your answers to 2 decimal places.)
Debt ratio
LotsofDebt, Inc.
LotsofEquity, Inc.
%
Calculate the equity multiplier. (Round your answers to 2 decimal places.)
LotsofDebt, Inc.
LotsofEquity, Inc.
Equity multiplier
times
times
Calculate the debt-to-equity. (Round your answers to 2 decimal places.)
Debt-to-equity
LotsofDebt, Inc.
LotsofEquity, Inc.
times
times

Answer 1

LotsofDebt, Inc Debt Ratio is 93.75%

LotsofEquity, Inc Debt Ratio is 6.25%

equity multiplier LotsofDebt, Inc is 16

equity multiplier LotsofEquity, Inc is 1.0666666667

debt-to-equity LotsofDebt, Inc is $15 million

debt-to-equity LotsofEquity, Inc. is $0.0666666667 million

Explanation:

In order to calculate the debt ratio of LotsofDebt, Inc and LotsofEquity, Inc. we would have to make the following calculations:

Debt Ratio = Debt/Assets

According to the given data we have the following:

LotsofDebt, Inc Debt=$30 million

LotsofDebt, Inc Asset=Debt + Equity = $30 million + $2 million = $32 million

Therefore, LotsofDebt, Inc Debt Ratio =$30 million/$ 32 million

LotsofDebt, Inc Debt Ratio= 93.75%

LotsofEquity, Inc. Debt=$2 million

LotsofEquity, Inc Asset= Debt + Equity = $2 million + $30 million

LotsofEquity, Inc Debt Ratio = $2 million/$32 million

LotsofEquity, Inc Debt Ratio = 6.25%

In order to calculate the equity multiplier of LotsofDebt, Inc and LotsofEquity, Inc. we would have to make the following calculations:

equity multiplier =Assets/Equity

equity multiplier LotsofDebt, Inc.=$32 million/$2 million

equity multiplier LotsofDebt, Inc= 16

equity multiplier LotsofEquity, Inc=$32 million/$30 million

equity multiplier LotsofEquity, Inc = 1.0666666667

In order to calculate the debt-to-equity of LotsofDebt, Inc and LotsofEquity, Inc. we would have to make the following calculations:

debt-to-equity LotsofDebt, Inc=Debt/Equity

debt-to-equity LotsofDebt, Inc=$30 million/$2 million

debt-to-equity LotsofDebt, Inc= $15 million

debt-to-equity LotsofEquity, Inc.= $2 million/$30 million = 0.0666666667

debt-to-equity LotsofEquity, Inc.= $0.0666666667 million