Question

Compute the percentage of the firm that is financed by debt provided that the firms assets of $5 million are financed by $3 million in Equity and the rest by long term debt.

Answer 1

The percentage of the firm that is financed by debt is:

40%

= $2 ($5 - $3) million/$5 million

= 40%

Step-by-step explanation:

The long-term debt financing is the difference between the total assets of the firm and the value of the firm's equity. The debts/assets ratio is the financial leverage that the firm employs in running the business. The implication is that creditors can lay claim to 40% of the assets of the firm since the assets are financed 40% from debts. The remaining 60% is financed by Stockholders' Equity.