Question

Two public corporations, First Engineering and Midwest Development, each show capitalization of $180 million in their annual reports. The balance sheet for First indicates total debt of $52 million and that of Midwest indicates net worth of $113 million. Determine the D-E mix for each company.

The D-E mix for First Engineering is  %–  %.

The D-E mix for Midwest Development is  %–  %.

Answer 1

The value of a company is the sum of the value of Equity and the value of debt.

We know that both firms have a capitalisation of $180 million, implying that they have a value of $180 million. It is also given that one of the companies has a net worth of $113 million. Net worth of a company is the value of "total assets less total liabilities" or total assets less total debt. Net worth also refers to the Equity portion of a company.

Therefore, we know that:

Thus, we calculate the value of Equity or First Engineering (FE) and Value of debt for Midwest Development (MD) as below:

Similarly, we have for Midwest Development

We now use these values to calculate the percentage of Debt and Equity in each Firm.

We can now write the Debt-Equity mix for both companies.

The D-E mix for First Engineering is 28.89% - 71.11%.

The D-E mix for Midwest Development is 37.22% - 62.78%.