Answered

You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?

Answer :

Answer:

Lots of Debt

debit ration  =  90%

equity multiplier  = 10 times

debt-to-equity ratio  = 9 times

Lots of Equity

debit ration = 10 %

equity multiplier  = 1.11 times

debt-to-equity ratio = 0.11 times

Explanation:

Given data

assets 1  = $100 million

debt 1 = $90 million

equity 1 = $10 million

assets 2 = $100 million

debt 2 = $10 million

equity 2 = $90 million

to find out

the debt ratio, equity multiplier, and debt-to-equity ratio

solution

we find first lots of debt in

so debit ration = debt 1 /  assets 1

debit ration = 90 /  100 =  90%

and

equity multiplier = assets 1  / equity 1

equity multiplier = 100  / 10 = 10 times

and

debt-to-equity ratio = debt 1  / equity 1

debt-to-equity ratio = 90  / 10 = 9 times

so as that  Lots of Equity

so debit ration = debt 2 /  assets 2

debit ration = 10 /  100 = 10 %

and

equity multiplier = assets 2  / equity 2

equity multiplier = 100  / 90 = 1.11 times

and

debt-to-equity ratio = debt 2  / equity 2

debt-to-equity ratio = 10  / 90 = 0.11 times

Other Questions