Question

Compute the percentage of the firm that is financed by debt provided that the firms assets of $5 million are financed by $3 million in Equity and the rest by long term debt.

Answer 1

Answer:

The percentage of the firm that is financed by debt is:

40%

= $2 ($5 - $3) million/$5 million

= 40%

Explanation:

The long-term debt financing is the difference between the total assets of the firm and the value of the firm's equity.  The debts/assets ratio is the financial leverage that the firm employs in running the business.  The implication is that creditors can lay claim to 40% of the assets of the firm since the assets are financed 40% from debts.  The remaining 60% is financed by Stockholders' Equity.