You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?

Lots of Debt

debit ration = 90%

equity multiplier = 10 times

debt-to-equity ratio = 9 times

Lots of Equity

debit ration = 10 %

equity multiplier = 1.11 times

debt-to-equity ratio = 0.11 times

Explanation:

Given data

assets 1 = $100 million

debt 1 = $90 million

equity 1 = $10 million

assets 2 = $100 million

debt 2 = $10 million

equity 2 = $90 million

to find out

the debt ratio, equity multiplier, and debt-to-equity ratio

solution

we find first lots of debt in

so debit ration = debt 1 / assets 1

debit ration = 90 / 100 = 90%

and

equity multiplier = assets 1 / equity 1

equity multiplier = 100 / 10 = 10 times

and

debt-to-equity ratio = debt 1 / equity 1

debt-to-equity ratio = 90 / 10 = 9 times

so as that Lots of Equity

so debit ration = debt 2 / assets 2

debit ration = 10 / 100 = 10 %

and

equity multiplier = assets 2 / equity 2

equity multiplier = 100 / 90 = 1.11 times

and

debt-to-equity ratio = debt 2 / equity 2

debt-to-equity ratio = 10 / 90 = 0.11 times