Question

In: Finance

Balance Sheet Current assets Cash 870,000 Acc receivable not given Inventories 1,050,000 Fixed assets 3,220,000 TOTAL...

Balance Sheet
Current assets
Cash 870,000
Acc receivable not given
Inventories 1,050,000
Fixed assets 3,220,000
TOTAL ASSETS 6,200,000

Current liabilities
Acc payable not given
Long-term debt 1,900,000
Common stock 680,000
Retained earnings 3,190,000
TOTAL LIAB and EQUITY 6,200,000

Income Statement
Sales 18,600,000
Operating expense 14,320,000
EBIT 4,280,000
Interest expense 266,000
EBT 4,014,000
Taxes 1,606,000
Net income 2,408,000

What is the firm's debt ratio?

30.65%

37.58%

62.42%

93.06%

89.03%

Solutions

Expert Solution

The answer to this question is as follows:

Firm's Debt Ratio = Total Debt of the firm / Total assets of the firm

Step 1 : Calculation of Total Debt of the firm:

Look for the debt or liabilities in the balance sheet:

  • Long term debt of 1,900,000
  • Accounts Payable : Not given

Lets Calculate the value the Accounts Payable:

Accounts Payable = Total Liabilities & Equity - Long term debt - Common stock - Retained Earnings

= 6,200,000 - 1,900,000 - 680,000 - 3,190,000

= 430,000

Total Debt of the firm = Long term debt + Accounts Payable

= 1,900,000 + 430,000

= 2,330,000

Step 2 : Calculation of Total Assets of the firm:

Total assets of the firm includes both current assets and fixed assets. As the value of total assets is given in the balance sheet i.e. 6,200,000 , therefore we don't need to find out the value of accounts receivables.

Total Assets of firm = 6,200,000

Step 3 : Calculation of Firm's Debt Ratio :

Firm's Debt Ratio = Total Debt of the firm / Total assets of the firm

= 2,330,000 / 6,200,000

= 0.3758 or 37.58 %

Therefore correct answer is second option i.e. 37.58%

jeff jeffy answered 1 year ago
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