Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt). The company is financed entirely with debt and common equity. What is Paper Clip's debt ratio?

Question

Dayton

Business

2 September, 10:40

Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt). The company is financed entirely with debt and common equity. What is Paper Clip's debt ratio?

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Answers (1)

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America Black · Answer 1

Paper Clip's Debt ratio is 0.25 or 25%

Explanation:

To calculate Debt ratio we need to find the value of Assets.

Asset turnover = Net sales / Total Assets

3 = $24,000,000 / Total Assets

Total Assets = $24,000,000 / 3

Total Assets = $8,000,000

Assuming that the only Liability is $2,000,000 on which the interest been paid.

Debt ratio = Total Debt / Total Equity

Debt ratio = 2,000,000 / 8,000,000

Debt ratio = 0.25 = 25%