Question

You are considering a stock investment in one of two firms (Lots of Debt, Inc. and Lots of Equity, Inc.), both of which operate in the same industry. Lots of Debt, Inc. finances its $34.25 million in assets with $32.25 million in debt and $2.00 million in equity. Lots of Equity, Inc. finances its $34.25 million in assets with $2.00 million in debt and $32.25 million in equity.

Calculate the debt ratio for each company. (Round your answers to 2 decimal places.)

Answer 1

Lots of debt incorporation debt ratio= 9.41%

Lots of equity incorporation debt ratio= 5.8%

Step-by-step explanation:

The debt ratio of Lots of debt incorporation can be calculated as follows

= Total debt /Total assets

= $32.25/$34.25

= 0.941×100

= 9.41%

The debt ratio of Lots of equity incorporation can be calculated as follows

= Total debt/Total assets

= 2/34.25

= 0.058×100

= 5.8%