Question

You are considering a stock investment in one of two firms (Lots of Debt, Inc. and Lots of Equity, Inc.), both of which operate in the same industry. Lots of Debt, Inc. finances its $34.25 million in assets with $32.25 million in debt and $2.00 million in equity. Lots of Equity, Inc. finances its $34.25 million in assets with $2.00 million in debt and $32.25 million in equity. Calculate the debt ratio. (Round your answers to 2 decimal places.) Calculate the equity multiplier. (Round your answers to 2 decimal places.)

Answer 1

Answer:

Debt Ratio = Total Debt Total/ Assets

Equity Multiplier = Assets/Equity

Lots of Debt

Debt Ratio

= 32.5/34.25

= 0.95

Equity Multiplier

= 34.25/2

= 17.13

Lots of Equity

Debt Ratio

= 2/34.25

= 0.06

Equity Multiplier

= 34.25/32.25

= 1.06