Question

The liabilities and​ owners' equity for Campbell Industries is found​ here: LOADING.... a. What percentage of the​ firm's assets does the firm finance using debt​ (liabilities)? b. If Campbell were to purchase a new warehouse for $ 1.4 million and finance it entirely with​ long-term debt, what would be the​ firm's new debt​ ratio?

Answer 1

Answer: a. 29.01%

b. 44.4%

Explanation:

a) This question is asking for the Debt to Asset Ratio which checks how much of a Firm's assets are financed by debt.

It is calculated by dividing Total Liabilities by Total Assets.

Total Assets from the Accounting Equation is the sum of Liabilities and Equity.

The question gives that as $6,595,000.

The Total Liabilities can in like manner be calculated by subtracting Total Equity from Assets.

The Total Equity is given by as $4,682,000.

Total Liabilities are therefore,

= $6,595,000 - $4,682,000

= $ 1,913,000

The Debt to Asset Ratio is therefore,

= Total Liabilities / Total Assets

= 1,913,000 / 6,595,000

= 0.2901

Debt to Assets Ratio = 29.01%

29.01% of the firm's assets are financed by debt.

b) $1.4 million in debt is used to buy a new warehouse. This means that both debt and Assets increase by 1.4 million.

The New Debt to Asset Ratio will be,

= Total Liabilities / Total Assets

= (1,913,000 + 1,400,000) / (6,595,000 + 1,913,000)

= 3,313,000 / 7,995,000

= 0.41438

= 41.44%

The New Debt ratio is 41.44%

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