Question

Nano-Technologies bought out RT-Micro using financing as follows: $23 million from mortgages, $3 million from retained earnings, $14 million from cash on hand, and $42 million from bonds. Determine the debt-to-equity mix.

The debt-to-equity mix is ____ % -- ____ %.

Answer 1

Solution :

As per the information given in the question we have

Finance raised through mortgages = $ 23 Million ; Finance raised through bonds = $ 42 Million

Finance raised through retained earnings = $ 3 Million ; Cash on hand = $ 14 million

Finance raised through Mortgages and bonds is the Debt component of Financing.

Thus the total Debt component of the Financing = Finance raised through mortgages + Finance raised through bonds

= $ 23 Million + $ 42 Million

= $ 65 Million

Finance raised through retained earnings is the Equity component of Financing

Thus the total Equity component of the financing = Finance raised through Retained earnings = $ 3 Million

Total of Debt and Equity components = $ 65 Million + $ 3 Million = $ 68 Million

Thus the Debt to equity Mix = ( Total Debt component of the Financing / Total of Debt and Equity components ) - - ( Total Equity component of the financing / Total of Debt and Equity components )

= ( $ 65 Million / $ 68 Millon ) - - ( $ 3 Million / $ 68 Millon )

= 0.9559 - - 0.0441

= 95.59 % - - 4.41 %

Thus the Debt equity Mix = 95.59 % - - 4.41 %

Note : Cash on hand is an asset. Thus the same cannot be considered in determining the Debt – Equity Mix