Question

Urgent Corporation had earnings per share of $4 last year, and it paid a $2 dividend.

Total retained earnings increased by $12 million during the year, and book value per

share at year-end were $40. Urgent Corporation has no preferred stock, and no new

common stock was issued during the year. If Argent’s year-end debt (which equals its

total liabilities) was $120 million, what was the company’s year-end debt/assets ratio?​

Answer 1

To find the debt/assets ratio of Urgent Corporation, calculate the total equity by adding the increase in retained earnings to the book value per share and multiplying by the number of shares. Then, total assets are the sum of total equity and total liabilities. The debt/assets ratio is 50%.

Step-by-step explanation:

To calculate Urgent Corporation's year-end debt/assets ratio, we need to find the company's total assets first. Since no new common stock was issued and the company has no preferred stock, the increase in retained earnings indicates an increase in equity. Hence, the increase in retained earnings ($12 million) can be directly added to the book value (equity) per share to obtain the total equity.

The total number of shares is calculated by dividing the increase in retained earnings by the earnings per share (EPS) subtracted by the dividend paid per share:

Number of Shares = Increase in Retained Earnings / (EPS - Dividend per Share) = $12,000,000 / ($4 - $2) = 3,000,000 shares

Total Equity = Book Value per Share × Number of Shares = $40 × 3,000,000 = $120,000,000

Total Assets = Total Equity + Total Liabilities = $120,000,000 + $120,000,000 = $240,000,000

The year-end debt/assets ratio = $120,000,000 (Debt) / $240,000,000 (Assets) = 0.5 or 50%