Question

Atlanta Spokane

Total liabilities $610,000 $466,200
Total equity 630,000 1,648,000

Compute the debt-to-equity ratio for each of the above companies. Which company appears to have a riskier financing structure

Answer 1

Debt to Equity = Total liabilities / Total Equity

Atlanta

= 610,000/630,000

= 0.9682

= 0.97

Spokane

= 466,200/1,648,000

= 0.28

Atlanta appears to have the riskier financing structure because a higher debt to equity ratio signifies less capacity to be able to pay off debt with the equity which means there is a greater chance of default.