Question

1a)If you have $1,000 of equity and $1,000 of debt, what is your leverage ratio? Round your answer to the nearest one decimal place.

b)The financial information for Mary and William Spartan are stated below. Calculate the rate of growth of equity capital. Round your answer to the nearest tenth of a percent (one decimal place).
Assets                                                   $620,000
Liabilities                                              360,000
Returns to assets                                 68,200
Interest expense on debt                27,000
Income taxes                                         10,300
Consumption withdrawals               25,000

Answer 1

Solution:

1. a) Leverage Ratio:

Debt - Equity Ratio= 1 Debt/Equity

Explanation:

Leverage Ratio:

Given:

Equity = $1,000

Debt = $1,000

To Find: Debt - Equity Ratio

Debt - Equity Ratio = Equity / Debt

Debt - Equity Ratio = 1000 / 1000

Debt - Equity Ratio = 1

Therefore, Debt - Equity Ratio is 1 Debt/Equity.

b) The Rate of Growth of Equity Capital = 11.88 %.

Explanation:

Given:

Assets = $620,000

Liabilities = $360,000

Returns on Assets = $68,200

Interest Expense on Debt = $27,000

Income Taxes = 10,300

To Find: Growth Rate of Equity Capital

Growth Rate of Equity Capital = ( Net Income / Stockholder's Equity ) X 100

Growth Rate of Equity Capital = [ ( Return on Assets - Interest Expense on Debts - Income Taxes ) / ( Assets - Liabilities ) ] X 100

Growth Rate of Equity Capital = [ ( 68,200 - 27,000 - 10,300 ) / ( 620,000 - 360,000 ) ] X 100

Growth Rate of Equity Capital = [ 30,900 / 260,000 ] X 100

Growth Rate of Equity Capital = 11.88

Therefore, Growth Rate of Equity Capital is 11.88%.