Question

Tiggie’s Dog Toys, Inc. reported a debt-to-equity ratio of 1.75 times at the end of 2018. If the firm’s total assets at year-end were $25 million.How much of their assets are financed with debt and how much with equity?

Answer 1

Answer:

Total debt is $15.91million

Total equity is 9.09miliion

Explanation:

Debt-to-equity ratio relates to how a firm is financing its operations through debt versus shareholders' equity(owners' fund)

The formula is: Total debt/total equity

Debt-to-equity ratio = 1.75times

Total assets =$25 million

We know the Equity = Asset - liability(debt)

We can rewrite the equation as:

Debt-to-equity ratio = Total debt/asset - debt

Let's represent debt as 'y'

1.75 = y/$25million - y

y = 1.75($25million - y)

y = $43.75 - 1.75y

Collect the like terms

y + 1.75y = $43.75million

2.75y = $43.75million

y = $43.75million/2.75

y = $15.91million

Therefore, total debt is $15.91million

Using the same formula: Total debt/total equity

Lets represent equity with z

1.75 = $15.91million/z

z = 15.91million/1.75

z = 9.09miliion

Therefore total equity is 9.09miliion

Answer 2

Answer:

The correct answer is: Tiggie’s Dog Toys, Inc. financed operations with $15,909,091 debt and $9,090,909 of equity.

Explanation:

The Debt-to-Equity (D/E) ratio is a measure of a company's financial leverage. It is calculated by dividing the company's total liabilities with the shareholder's equity considering that the sum of both items equals the company's assets. Higher risk entities tend to have a high debt-to-equity ratio.

In the case:

• $D/E = \frac{Total Liabilities}{Total Shareholders' Equity}$

• Total Assets = Total Liabilities + Total Shareholder's Equity

Then, if:

• Total Liabilities = x
• Total Shareholder's Equity = y

• $D/E = \frac{x}{y}$ ...(I)

• Total Assets = x + y ...(II)

So, in (II):

• 25,000,000 = x + y

• 25,000,000 - y = x ...(III)

(III) in (I):

• $1.75 = \frac{(25,000,000-y)}{y}$
• (1.75)y  = 25,000,000 - y
• (2.75)y = 25,000,000
• y = 9,090,909

Thus, in (II):

• 25,000,000 = x + 9,090,909
• 25,000,000 - 9,090,909 = x
• 15,909,091 = x

Then:

• Total Liabilities = $15,909,091
• Total Shareholder's Equity = $9,090,909

Tiggie’s Dog Toys, Inc. financed operations with $15,909,091 debt and $9,090,909 of equity.