Question

Using the following information, determine the debt-to-equity ratio for Montreal Computing Power Company:

Balance sheet of Montreal Computing Power Company:
Cash and marketable securities		75		Accruals		100
Inventory		350		Accounts payable		350
Prepaid expenses		150		Short-term debt		250
Other current assets		1,500		Other current liabilities		500
Net fixed assets		3,925		Long-term debt		2,800
				Shareholders’ equity		2,000
Total assets		6,000		Total liabilities and shareholders’ equity		6,000

a

1.400

b

1.525

c

1.775

d

1.950

Answer 1

Determine the debt-to-equity ratio for Montreal Computing Power Company?

Answer: 1.775

Working

Formula for calculating debt to equity ratio is provided below

Debt to equity = Total Liability ÷ Shareholder’s equity

Shareholder’s equity = 2,000

Total Liability      = Short-term debt + Long-term debt + other current liabilities

                        = 250 + 2,800 + 500

                        =3,550

Debt to equity = Total Liability ÷ Shareholder’s equity

                                = 3,550 ÷ 2,000

                                = 1.775

Note:

Accruals and Accounts payable will not form part of total liability for the purpose of debt to equity ratio calculation.